Joseph Krist

Publisher

FEDERAL INFRASTRUCTURE GRANTS

Since 2017, the idea that there was a new and better way to finance infrastructure seemed to always be just around the corner. As infrastructure day dragged into infrastructure week and month through the Trump administration, those ideas languished. Or maybe they never existed. Yet recent months have shown that good old fashioned federal funding for these large projects is emerging as the main catalyst for execution of some of these projects.

The biggest example is the federal grant funding for the Gateway Tunnel project in the NY metropolitan area. While initially stalled by New Jersey state action, the project received no support from the Trump administration. Once new administrations took over in NY and NJ, federal funding emerged.

Alabama Gov. Kay Ivey announced the U.S. Department of Transportation has awarded a $550 million grant to the Mobile River Bridge and Bayway Project. Initially conceived in the late 1990’s, the project had previously suffered from local objections to user-based funding. According to a 2019 public hearing survey conducted by U.S. Department of Transportation and ALDOT, 86% of people said they did not believe there is a need for this project, mainly because of a proposed toll.

The money comes from the Bridge Investment Program, which Congress created in 2021. It is a discretionary program of the U.S. Department of Transportation allowing states to compete for projects of national importance.  The Alabama Department of Transportation has acquired all of the land and completed preliminary steps, such as environmental impact statements and archaeological reviews. That put the project in a favorable competitive position.

The cost is now estimated at between $3.3 and $3.5 billion. The state already has $125 million from a grant awarded in 2019 under that Nationally Significant Multimodal Freight & Highway Projects program. The state has pledged at least $250 million, which is on top of $200 million already spent on preliminary measures. The latest federal grant brings the committed funding total to $1.075 billion. The state will apply for a TIFIA loan from the federal government as well.

The federal money does not mean that there will not be tolls on the new bridge. There is however, a pledge from the state that tolls will be limited to $2.50 for “frequent users”. The toll revenue will pay off any TIFIA loan as well as any additional borrowing undertaken by the State.

The Mobile project is the fifth such to be a grant recipient since the enactment of the IRA. It joins grants of $1.35 billion to the Brent Spence Bridge project to rehabilitate and reconfigure the existing span between Kentucky and Ohio over the Ohio River; $400 million to increase the Golden Gate Bridge’s resiliency against earthquakes; $158 million to for the Gold Star Memorial Bridge, which is part of the Interstate 95 corridor over the Thames River between New London and Groton in Connecticut and $144 million to rehabilitate four bridges over the Calumet River in Chicago.

Another grant will benefit two states with one project. The Tennessee Department of Transportation announced in May of this year that they were studying plans for a new bridge to replace the current 75-year-old bridge that connects Memphis and Arkansas. The current I-55 bridge is “not designed for modern interstate standards.”

The Tennessee and Arkansas Departments of Transportation have now been granted over $393 million by the federal government for the new I-55 bridge. It will be combined along with the Tennessee Department of Transportation, and the Arkansas Department of Transportation which have each committed up to $250 million to the project.

CLIMATE LITIGATION

A Baltimore Circuit Court Judge dismissed the City of Baltimore’s lawsuit against the big oil companies saying that the case belongs in federal rather than state court. The decision is at odds with how other courts have ruled in similar cases, including a Maryland state court that allowed climate deception lawsuits that the city of Annapolis and Anne Arundel County separately brought against fossil fuel companies to proceed to trial. 

The U.S. Court of Appeals for the Second Circuit issued a similar ruling in a case called City of New York v. Chevron. Courts in Hawaii, Massachusetts, Colorado ruled the opposite and said that the cases could move forward. The US Supreme Court declined to hear in January of this year an appeal of a decision by the St. Louis-based 8th U.S. Circuit Court of Appeals. That court found that Minnesota’s lawsuit accusing the energy industry of engaging in decades of deceptive marketing to undermine climate science and the public’s understanding of the dangers of burning fossil fuels belonged in state court, where it was originally filed.

Eight U.S. appeals courts have affirmed lower court decisions remanding similar climate cases to state courts, finding generally that the lawsuits exclusively raise state law claims and thus federal courts do not have jurisdiction.

HOUSTON CLIMATE TROUBLES

The last decade has been tough on the City of Houston. There was Hurricane Harvey in 2017. The state’s electrical grid failure during the winter of 2021. Nearly one week without power in May of this year. Now, over a week without power from Hurricane Beryl. More than 2.2 million customers of the local utility, CenterPoint Energy, were without power at the peak of the outages last week.

Before the storms, Harris County, which includes Houston, had been experiencing net negative migration from other parts of the country.  Since 2016, according to U.S. census data, more people have left Harris County for other counties than have moved in from elsewhere. That trend continued after 2017 when Hurricane Harvey flooded large areas of the city.

STATE BUDGETS

In June, Hawaii Governor Josh Green (D) signed into law the largest income tax cut in that state’s history—totaling $5.6 billion in lost revenue by 2031. Meanwhile, the Kansas Legislature went into a special session to decide on tax relief, ultimately passing property and income tax cuts totaling $2 billion over five years. Nebraska is headed into a special session later this month to debate property tax cuts. Arkansas passed its third income tax cut in less than two years, lowering top corporate and personal rates by half a percentage point each and making the cut retroactive to the beginning of 2024.

FY 2024 is the last to see any more fiscal help related to the pandemic. Now, the impacts of policy decisions made during the pandemic when there was a lot of extra money sloshing around government budgets are becoming clear. Revenue growth is slowing but so are expenditures. One area receiving attention is employee compensation. It has been markedly harder for governments to adequately meet their staffing needs both through recruitment and retention.

Thirty-one states, the District of Columbia (DC), and Puerto Rico reported proposed across-the-board (ATB) pay increases for at least some employee categories in fiscal 2025. Additionally, 14 states, DC and the U.S. Virgin Islands proposed at least some merit increases. These moves come as thirty-three states reported that general fund collections for fiscal 2024 from all revenue sources (including sales, personal income, corporate income, and other revenues) were coming in higher than original estimates used in enacted budgets.

Collections were on target with original estimates in seven states and lower than projected in ten states. Compared to fiscal 2024 current estimates, fiscal 2025 revenue forecasts in governors’ budgets project 2.4 percent growth in sales and use taxes, 2.9 percent growth in personal income taxes, a 0.8 percent decrease in corporate income taxes, and 2.0 percent decrease in all other general fund revenue.

DATA CENTERS AND POWER

According to the Energy Information Administration, U.S. commercial sector electricity use grew 1% last year from 2019 levels. That is the headline. The reality is that the growth in commercial demand for electricity is concentrated in a handful of states experiencing rapid development of large-scale computing facilities such as data centers. Electricity demand has grown the most in Virginia, which added 14 BkWh (billion kilowatt hours), and Texas, which added 13 BkWh.

Commercial electricity demand in the 10 states with the most electricity demand growth increased by a combined 42 BkWh between 2019 and 2023, representing growth of 10% in those states over that four-year period. By contrast, demand in the forty other states decreased by 28 BkWh over the same period, a 3% decline.

Virginia has become a major hub for data centers, with 94 new facilities connected since 2019 given the access to a densely packed fiber backbone and to four subsea fiber cables. Demand for electricity by the commercial sector in some large states such as New York, Illinois, and California has been flat or has declined compared with 2019.

Nationally, EIA projects that U.S. sales of electricity to the commercial sector will grow by 3% in 2024 and by 1% in 2025.  The South Atlantic and West South Central census divisions together account for 40% of U.S. commercial electricity demand. EIA now expects that commercial consumption in the South Atlantic will increase by 5% in 2024 and 2% in 2025 and in West South Central by 3% this year and 1% next year. 

The U.S. electric power sector generated 5% more electricity in 1H24 than 1H23 because of a hotter-than-normal start to summer and increasing power demand from the commercial sector. EIA expects a 2% increase in U.S. generation in 2H24 compared with 2H23, with solar power, the fastest growing U.S. source, generating 36 billion kilowatt hours (BkWh) more electricity in 2H24 than in 2H23 (an increase of 42%).

Solar power is the fastest growing source of electricity in the United States. We expect 36 billion kilowatt hours (BkWh) more electricity to be generated in the United States from solar in 2H24 than in 2H23, an increase of 42%. We forecast 6% more U.S. wind generation during 2H24–12 BkWh more than in 2H23—driven by more wind turbines coming on line, and we forecast 4% (5 BkWh) more hydropower, as a result of slightly improved water supply conditions this year.

ELECTRIC VEHICLES

Electric vehicles, including plug-in hybrid vehicles are taken into dealerships at a rate three times higher than that of gas-powered cars. That comes from the J.D. Power 2024 Initial Quality Survey. According to the study, battery electric vehicles averaged 266 problems per 100 vehicles, about 48% more than gas- and diesel-powered vehicles, which averaged 180 problems per 100 vehicles. The good news is that the issues do not reflect electric cars breaking down as much as they reflect issues with the technology inside the vehicle.

The failures tended to involve things like issues with infotainment systems, which was the most problematic area in the study. Issues with in-vehicle features and controls like windshield wiper or turn signal display buttons, false warnings from advanced driver assistance systems, difficulty connecting to the vehicle with popular apps like Apple CarPlay and Android Auto drove negative ratings.

These findings won’t help to reverse current sales trends in the electric vehicle space. General Motors said it now expected to make 200,000 to 250,000 battery-powered cars and trucks this year, about 50,000 fewer than it had previously forecast. In Oakville, Ontario, a production facility recently stopped making the gasoline-powered Ford Edge S.U.V.

It was slated to shift to new electric versions of the Ford Explorer and Lincoln Aviator, both three-row S.U.V.s. Instead, Ford will turn the factory in Oakville into a third production location for its Super Duty pickup trucks, which are among its most profitable models. It also positions Ford and the others to mitigate against likely Trump administration moves to eliminate tax breaks currently benefitting EV sales. It would seem to increase concerns (if not doubts) about projects announced but as yet undeveloped.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

CALIFORNIA URBAN WATER REGULATION

The California State Water Resources Control Board approved regulations that will set long-term limits on the amounts of water the state’s urban utilities can use on an annual basis. The goal is to generate about 500,000 acre-feet in water savings each year by 2040. The new rules arose as the result of legislation from 2018. The regulation is expected to apply to 405 urban suppliers, which collectively provide water to about 95 percent of California’s population, according to the Water Board.

Each year a water utility will be required to generate an “urban water use objectives” plan and will require compliance beginning in 2027. The limits will be phased in over the ensuing 13 years. The expectation is that ultimately annual water savings will approximate 500,000 acre feet. The mechanics of how each regulated utility achieve these goals – legal, regulatory, education, enforcement – are left to each utility. What will apply across the board is that in the event that a water utility exceeds its usage limits, it will be fined $10,000 a day until usage returns to required levels.

According to the board’s estimates, cuts greater than 30 percent will only affect six suppliers (two percent of all suppliers in the state affected by the regulation) by 2025 and 46 (12 percent) by 2040; this means that 118,370 people will be affected by the largest cuts by next year, and 1,733,569 in 15 years. The regions where water suppliers will be asked to make the biggest cuts to water delivery (greater than 30 percent) by 2040, are South Coast, San Joaquin Valley, and Tulare Lake.

The reductions needed to meet the objective based on 2040 standards, relative to the subset of urban uses subject to standards, will be of 92 percent for the City of Vernon; 58 percent for City of Atwater; 50 percent for Oildale Mutual Water Company; 45 percent for the West Kern Water District; and 43 percent for the City of Glendora.

Sixty-five percent of suppliers serving 29,157,064 people will initially be unaffected as of next year. By 2040, 31 percent of suppliers serving 12,459,736 residents would have avoided a reduction in water delivery entirely. Eight percent will see a reduction of less than 5 percent; 13 percent will have to cut water delivery between 5 and 10 percent; 21 percent between 10 and 20 percent; and 15 percent between 20 and 30 percent.

The new rules must still receive the final approval of the Office of Administrative Law. If approved, the regulation will come into effect by January 1, 2025. 

KEY BRIDGE COLLAPSE IMPACT

The financial impact of the Key Bridge in Baltimore was always going to be about more than the cost of replacement. It is expected that the Federal government would pick up much of the cost of that project. In the meantime, the impact on operating revenues is a different story. The Maryland Transportation Authority operates 7 other facilities – three bridges, two tunnels and two turnpikes – funded by tolls covering operations and maintenance and debt service.

The Authority’s Board was recently advised that a $153 million decline in toll revenues throughout the 2024 through 2030 forecast period is expected. While mostly attributed to the Key Bridge, the forecast sees a decline of usage across the entire Authority portfolio. That will likely cause tolls to rise sooner than initially planned.

It is noted that the Authority emphasized its need to not only meet operating needs but also to respect its various bond covenants.   “Beginning in fiscal year 2028, a systemwide total increase will be necessary to maintain two-times debt service coverage throughout the remainder of the forecast period.”

PENSION FUNDING

Earlier this year, the City of Houston reached a long sought labor agreement with its firefighters. The hurdle that proved the highest to climb was the issue of funding levels. It was important to the unions that pension funds be adequately funded. The high levels of underfunding and the increasing cost of funding had been a long time negative weight on the City’s credit. Now, the City has turned to the capital markets to help it meet obligations it incurred in reaching the labor agreement.

The key component is the provision of some $650 million to increase the fun ding level of the pension funds. The plan is to issue debt to fund the expenditure. The wrinkle is that many municipalities have turned to pension funding bonds (pension obligation bonds or POB) to increase funding. The usual mechanism however is to issue POB which are not backed by the taxing power of the issuing municipality.

Houston is choosing to use debt but is also issuing that debt in the form of general obligation debt. That is a pledge of taxing power in support of this debt for an operating cost. In this case, the bond issue would provide the $650 million to be turned over to the pension fund. It also comes as the City seeks to fund the cost of salary increases agreed to as a part of the overall contract package.

The plan has earned pressure on the City’s ratings.  S&P Global Ratings revised the outlook on Houston’s AA rating to negative from stable. “The negative outlook reflects challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increases.” 

The City also faces increasingly frequent flood and hurricane events generating increased expenses. It also faces legal issues from an April Texas court ruling in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund. The Court found that the amount subject to transfer is limited under state property tax laws. The estimated revenue hit if that survives all the way through the state court system is $110-120 million annually.

The City of East St. Louis has long been a depressed credit. It has often underfunded its pension funds as a way of maintaining current budget balance. Under state law, pension boards which oversee the funds can request that the State Comptroller intercept state aid to a city and direct those funds to the pension funds. For months, the City and its pension boards have been negotiating over how much the City needs to put in during its current fiscal year. The Police Pension Fund has now decided to request that the State Comptroller intercept some $3.5 million to be deposited into that fund.

Now the City has chosen to challenge the intercept provisions in court. The City is suing the Police Pension Board and the Comptroller claiming that the intercept program is unconstitutional. The city is asking the court for a permanent injunction that would block the comptroller’s office. “The enforcement of this statue exacerbates existing inequalities by reducing the City’s ability to provide essential services that these communities rely on. The reduction in state funds due to the intercept will lead to decreased public safety, health services, and other vital municipal functions, disproportionately affecting minority residents.

The City stopped making monthly payments to the Police and Fire pension funds after September of last year. The Funds indicated in January that they would seek impoundment without funding. Since then, the Fire and Police Funds have taken slightly different approaches. The Fire pension fund negotiated an agreement with the city in March. Under that deal, the city government agreed to put $4.5 million into the fire pension fund by the end of May.

The East St. Louis Police Pension Board says the city owes $3.5 million to the fund, covering fiscal years 2016, 2019 and 2021. The city says it received less than that – about $3.3 million – from the state during the first quarter of this year. It takes some 60 days to process an intercept request which would put a decision into August. A local judge has issued a temporary restraining order that stops the intercept from proceeding, for now. A hearing will be held on August 5 which is six days before an intercept could occur.

MUNICIPAL FINANCE AND HOMELESSNESS

One of the more intractable problems which is also the most visible is that of homelessness and its intersection with mental illness. The lack of facilities, the reluctance to fund or locate needed facilities and current politics have all stood in the way of dealing with the issue. Now a recent financing and a project groundbreaking are showing what can be accomplished through the municipal market.

The Mead Valley Wellness Village is a 450,000 sq. ft. behavioral health campus with five main buildings: a Community Wellness and Education Center, a Children’s and Youth Services building, Urgent Care Services, Supportive Transitional Housing, and Extended Residential Care. It includes residential as well as outpatient facilities. There are provisions for families as well. They reflect the state of the art in terms of holistic treatment of the overarching problem.

The facilities will be operated by Riverside University Health System–Behavioral Health (RUHS-BH), a county agency.  The County owns the land – an 18 acre site near Perris, CA – and created an entity specific to this project to act as landlord. Through this structure, the County has affected a P3 with the developer and builder/designer at risk through construction. Upon acceptance of the facility, the County’s obligation to make lease payments kicks in.

The location of the facility isn’t exactly a garden spot off I-215. That reflects the difficulty in siting projects like this. There isn’t much around to object to it. The facility is anticipated to open in 2026 and is estimated to have an annual impact of more than $78 million and will lead to more than 800 jobs.

PIPELINES ON THE BALLOT

The South Dakota Secretary of State has certified a ballot item which could repeal legislation seen as supportive of the Summit Carbon Systems proposed pipelines. Senate Bill 201 was enacted in 2023. Pipeline opponents were able to gather signatures in numbers well above the requirement. This puts the law in the classification of a “referred law.” It’s uncommon, The last referred law vote was in 2016.

Senate Bill 201 allows counties to collect a pipeline surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion. It provides that commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. That means local rulemaking still exists, and the decision to make a carbon pipeline company comply with those setbacks still rests with the Public Utilities Commission.

FEMA FLOOD RULES

Since August 2021, FEMA has partially implemented the Federal Flood Risk Management Standard (FFRMS). Prior to the FFRMS, FEMA required non-critical projects to be protected to the 1% annual chance (100-year) flood to minimize flood risk. Critical projects, like the construction of fire and police stations, hospitals and facilities that store hazardous materials, had to be protected to the 0.2% annual chance (500-year) flood. This standard reflected only current flood risk.

The FFRMS will increase the flood elevation — how high — and floodplain — how wide — to reflect future, as well as current, flood risk. Until now, implementation relied on existing regulations to reduce flood risk, increasing minimum flood elevation requirements for structures in areas already subject to flood risk minimization requirements, but not horizontally expanding those areas (widening of a flood plain). That was a problem exposed when prior storms revealed that much development was occurring in flood plains in Harris County, TX.

One of the major distinctions between partial and full implementation are the expansion of the floodplain to reflect both current and future flood risk and the requirement to consider natural features and nature-based solutions.  Less reliance on sea walls and the like and more on softer more absorptive natural areas with greater spacing between development on the shore or the riverbank.

Given the last 10 days or so of weather up here in the NYS woods, the argument over climate change is pretty much over. So, it’s only rational to face reality and mitigate risk. No reason for the government not to apply at least some insurance industry common sense. In this case, it’s at least based on some evidence. The efforts at flood mitigation in the Rockaways for housing and other smaller areas on Staten Island and in New Jersey in the wake of Superstorm Sandy provided that. It does hit values no doubt but we haven’t seen evidence of real fiscal problems.

It’s appropriate that the release came as a spate of storms has been brewing. The predictions have been for a more dangerous than normal storm season. It’s clear that the issue of managed retreat is going to gain prominence. Just this week the situation in Houston has been pretty severe so this is becoming almost a regular occurrence there. There was already a realization that planning maps needed to be adjusted in Harris County. The same is true in rural Vermont where it’s two years in a row for one town.

Eventually, the insurance market will tighten and the pressure against building back will increase.

PREPA BANKRUPTCY

The never ending process we know as The Puerto Rico Electric Authority bankruptcy may be closer to an ending but not a solution. The bankruptcy court has given the Oversight Board, PREPA and its creditors some 60 days to come up with a workable Plan of Adjustment. The parties have been negotiating but to no avail. Now, the judge has raised the potential for the bankruptcy to be dismissed if a solution cannot be found.

Mediation efforts have come up short with the mediator expressing a pessimistic view. “I must tell you the mediation team does not see a prospect for meaningful, serious negotiations between the parties. “We’ve no reason to believe that either side is ready to move enough to facilitate a realistic settlement.” The judge noted that a “failure to act with any degree of decency and compassion for the plight of over three million people, who are living in often unbearable heat, paying high bills for electrical service that is unacceptably unreliable and suffering through increasingly expensive failures of those charged with transforming their power system to accomplish discernable change.”

Both sides in the process were admonished for taking unrealistic positions in their negotiations. Bondholders are being “expansively aggressive in their attack” and are “likely delusional” in some of them, Swain said. Despite their arguments, there doesn’t seem to be “meaningful” net revenues available. The judge noted that none of the parties’ written submissions charts a path to a conclusion of the case. Both sides include positions rejected by the First Circuit on appeal.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

This week we celebrate the nation’s 248^th birthday. Enjoy whether you’re off for the week, long weekend, or just the day. We will take a mid-year break next week. The next issue will be dated July 15.

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CARBON PIPELINES

The Iowa Utilities Board gave its approval for the controversial Summit Carbon Solutions pipeline and for the company to use eminent domain to acquire landowners’ property. In giving its approval to the project, the Iowa Utilities Board ruled that Summit cannot begin construction in Iowa until the necessary permits are secured in South Dakota and North Dakota. 

The Iowa House approved legislation the past two sessions that would have given landowners more leverage over pipeline negotiations. In 2023, the House passed a bill requiring pipeline companies to obtain voluntary easements for 90% of their routes before they could use eminent domain for the rest. This year, the House voted to allow landowners who are subject to eminent domain requests by carbon dioxide pipeline companies to challenge the legitimacy of those requests in court earlier in the permit proceedings. Neither bill advanced in the Senate.

COAL REGULATION

The Supreme Court temporarily put on hold an Environmental Protection Agency plan to limit air pollution that drifts across state lines. The “good neighbor” plan would require factories and power plants in Western and Midwestern states must cut ozone pollution that drifts into Eastern ones. Under the Clean Air Act, states are allowed to devise their own plans, subject to approval by the E.P.A. In February 2023, the agency concluded that 23 states had not produced adequate plans to comply with its revised ozone standards. The agency then issued its own.

Resulting litigation ultimately left 11 states subject to the new rules. Ohio, Indiana and West Virginia, along with energy companies and trade groups — challenged the federal plan directly in the United States Court of Appeals for the District of Columbia. When a three-judge panel of that court refused to suspend the rule while the litigation moved forward, the challengers asked the Supreme Court to step in.

That is the basis of the suspension of the rules. It comes as a larger case is due to be decided on the larger issue of whether courts must defer to the reasonable interpretations by agencies like the E.P.A. of ambiguous statutes enacted by Congress. It was a true split decision with the liberal wing aligning with Justice Barrett in a strong dissent. “The court today enjoins the enforcement of a major Environmental Protection Agency rule based on an underdeveloped theory that is unlikely to succeed on the merits.” She notes that the plans “have been temporarily stayed,” and, “no court yet has invalidated one.”

TAXES AND TRANSIT

The decision to stop the implementation of congestion pricing in Manhattan drove quick consideration of replacing the revenue to be generated with taxes on business. That alternative was just as quickly rejected. Now, the MTA is left with threatening projects designed to comply with the ADA and other projects. The idea that those benefitting from the transit system should help pay for it has fallen on deaf ears in Albany.

In the meantime, New Jersey is showing New York how to do it. An agreement has been reached with the 600 corporations in the state that make at least $10 million a year in profits. Those firms will pay a 2.5% tax on all earnings for five years. The state in turn will not pursue restoring the sales tax to 7% from to 6.625%.

The announcement comes after a difficult couple of weeks for NJ Transit commuters who come into NYC through Penn Station. Power was lost on tracks (owned by Amtrak) which forced thousands to be stranded in the excessively hot conditions plaguing the region last week.

CALIFORNIA BALLOT

The California Supreme Court issued a ruling to invalidate the Taxpayer Protection Act, which would have made it harder to pass or raise taxes in California. The Act was part of a proposed ballot initiative scheduled for November. The ruling comes as the deadline for removing ballot initiatives occurs this week. A second announcement concerned a 2004 law which allowed workers to sue their employers on behalf of the state and other employees.  An agreement between organized labor and business groups will remove the initiative to repeal the Act.

The Bay Area Housing Finance Authority (BAHFA) today adopted a resolution to place a general obligation bond measure on the November 5 general election ballot in each of the nine Bay Area counties to raise and distribute $20 billion for the production of new affordable housing and the preservation of existing affordable housing throughout the region. 

The proposed bond measure calls for 80 percent of the funds to go directly to the nine Bay Area counties (and to the cities of San Jose, Oakland, Santa Rosa and Napa, each of which carries more than 30 percent of their county’s low-income housing need), in proportion to each county’s tax contribution to the bond. The remaining 20 percent, or $4 billion, would be used by BAHFA to establish a new regional program to fund affordable housing construction and preservation projects throughout the Bay Area.

Most of this money (at least 52 percent) must be spent on new construction of affordable homes, but every city and county receiving a bond allocation must also spend at least 15 percent of the funds to preserve existing affordable housing. Almost one-third of funds may be used for the production or preservation of affordable housing, or for housing-related uses such as infrastructure needed to support new housing. 

The BAHFA bond measure currently would require approval by at least two-thirds of voters to pass. Voters throughout California this November will consider Assembly Constitutional Amendment 1 (ACA 1) — which would set the voter threshold at 55 percent for voter approval of bond measures for affordable housing and infrastructure. If a majority of California voters support ACA 1, the 55 percent threshold will apply to the BAHFA bond measure.

AUTONOMOUS AND ELECTRIC VEHICLES

When GM’s Cruise autonomous taxis were forced off the streets of San Francisco, it led to questions about the division’s management. Now, a new CEO has been appointed. Since the California AV operation was halted, Cruise has since laid off a quarter of its work force and removed nine executives. As much as there were issues with the technology, good old fashioned management execution failures shared at least equal blame.

In the interim, AV competitors have had more favorable if limited experiences. Waymo, a subsidiary of Alphabet, has had driverless taxis operating in the Phoenix area since 2020 and San Francisco since late 2022 without serious incidents. It recently began service in Los Angeles. Zoox, an Amazon subsidiary, has been testing a steering-wheel-free robot taxi in Las Vegas since last June.

Cruise currently conducts limited testing of its supervised autonomous testing, with two safety drivers per vehicle. Those tests are underway in Phoenix.

The electric car movement has had a rocky time lately. Slowdowns in new electric car sales and announcements of delays in the development of planned production facilities had raised concerns. One example of the phenomenon is Georgia. Rivian the electric truck maker planned to construct a new production facility with substantial state support including subsidies. Rivian already had a production facility in Illinois.

Earlier this year, Rivian announced a pause in the development of its Georgia plant. Because it reflected lower than expected sales, there was a concern that the delay might be a sign of greater problems which could threaten the existing plant space. Amazon is still a significant Rivian shareholder and is one of its biggest customers.in Normal, IL. This week, a deal was announced which served to dampen those fears.

Volkswagen announced that it would invest up to $5 billion in Rivian and that the companies would cooperate on software for electric vehicles. Volkswagen said it would initially invest $1 billion in Rivian, and over time increase that to as much as $5 billion. If regulators approve the transaction, Volkswagen could become a significant shareholder. Rivian said the cash from Volkswagen would help the launch of a midsize S.U.V. called the R2 that will sell for about $45,000, and to complete the factory in Georgia. 

This represents more big money coming into the electric vehicle space. Amazon retains a significant ownership piece in Rivian and is Rivian’s largest truck customer.

WIND

The Vineyard Wind 1 project is now delivering more than 136 megawatts (MW) to the electric grid in Massachusetts. (New York’s South Fork Wind, the US’s first complete utility-scale offshore wind farm, is 132 MW.) This makes Vineyard 1 the largest operating offshore wind farm in the U.S. In February 2024, Vineyard Wind delivered approximately 68 MW from five turbines to the grid.

Vineyard Wind 1 now has 10 turbines in operation, enough to power 64,000 homes and businesses. The installation of a 22nd turbine is underway. Once completed, the project will consist of 62 wind turbines. It began offshore construction in late 2022, achieved steel-in-the-water in June 2023, and completed the US’s first offshore substation in July 2023.

OPIOIDS

It took years of painstaking negotiations to achieve a settlement to resolve the bankruptcy of Purdue Pharma and its owners, the Sackler family. One of the main features of the bankruptcy proceedings was the agreement that the Sacklers themselves would be protected from personal liability related to opioids. That resulted in $6 billion being pledged to states, local governments, tribes and individuals.

This week, the Supreme Court decided that the federal bankruptcy code does not authorize a liability shield for third parties in bankruptcy agreements. As a result, members of the Sackler family, who controlled Purdue Pharma, the maker of the OxyContin, will no longer be subject to a condition of the deal that granted the Sackler family immunity from liability in opioid-related lawsuits, even as they had not declared bankruptcy.

The first opioid lawsuits were filed against Purdue Pharma a decade ago. In 2019, Purdue filed for bankruptcy restructuring, which ultimately paused the lawsuits. The ruling effectively prevents the release of billions of dollars to plaintiffs from that settlement. That hold up has generated division within the ranks of plaintiffs. Some believe that the immunity provisions were worth the availability of payments. Now, what was seen as the longstanding primary obstacle to a deal has been placed at the center of any negotiation.

HOSPITAL TAXES

The Denver City Council approved putting a 0.34% sales tax increase on the Nov. 5 ballot to aid Denver Health, Colorado’s sole safety net healthcare provider. Uncompensated care totaled $140 million last year. That was an increase from $120 million in 2022 and $87 million in 2021. Those costs coincide with the arrival of migrants shipped into Denver primarily by the State of Texas.

The tax increase is estimated to produce $70 million annually. Under an annual operating agreement with Denver, the health system was allocated $73 million in funding for fiscal 2024. Colorado lawmakers this year passed $5 million in one-time funding, the same supplemental payment provided to the health system last year.

STADIUMS ARE BACK

The City of Charlotte has decided to continue to apply hotel and restaurant generated sales taxes to support the home of the NFL Carolina Panthers. It approved some $650 million of financing supported by existing hotel and restaurant taxes. The normal controversies around stadium renovations were in play here. They centered around the Panthers’ eccentric and impetuous owner. A combination of some poor public conduct choices and a poor won/loss record during his ownership tenure pressured the approval process.

In the aftermath of a failed referendum item to support taxes in greater Kansas City, MO to fund a new baseball stadium and improved foot ball stadium, proponents are looking west across the Missouri River for alternatives. The Kansas Legislature held a quick session to debate a financing package to join the Kansas Speedway as major sports venues in the state.

STAR Bonds are used to assist the development of major entertainment or tourism destinations in Kansas. State and local sales tax revenue generated by the attraction and associated retail development are used to pay back the bonds. In metropolitan areas, STAR Bonds can be used only for projects with an anticipated capital investment of $75 million and with at least $75 million in projected gross annual sales.

The professional sports facilities STAR bonds, which could be issued by a city, county, or the Kansas Development Finance Authority, will be backed by the incremental increase in sales taxes collected in a district created for the project and up to 100% of liquor sales within that district. The law also includes the potential for shares of sports betting and state lottery revenue. Besides expanding STAR bond-financed project costs to 70% from the current 50%, the law extends the maturity of the debt to as much as 30 years, up from 20 years. 

The economic rivalry between the Kansas and Missouri sides of the KC metropolitan area is longstanding. Tax policy and business locations have been flexible to say the least over the years as taxpayers tried to keep up the with the best deals. The situation with the two pro sports franchises just highlights the phenomenon at a significantly larger scale.

No professional sports franchise in the U.S. should ever ‘need’ public money for their stadia. The incredible appreciation of value of sports franchises continues as evidenced by recent team sales. We again are about to embark on a new cycle of stadium finance. We are already seeing the irrationality of the whole process. One difference now as opposed to the last cycle is that the cost of sports attendance is out of control. Now, the public is being asked to pony up funds for facilities they will likely never attend due to cost.  

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

CALIFORNIA HOUSING

One of the approaches to solving California’s affordable housing shortage has been the use of Accessory Dwelling Units (ADUs). As was the case after the post-war expansion in the second half of the 20^th century, many of California’s communities enacted restrictive zoning codes in the 1940s, 50s, and 60s to limit population density. Like the other jurisdictions across the country, the laws designated large areas for single-family residences and enforced minimum lot sizes, effectively controlling urban sprawl. 

A combination of demographic issues along with tax policy that discourages the transfer of homes over the generations have kept homes off the market. To address this, homeowners hoped to be able to create housing on oversize lots. The concept behind the move was historically reflected in “mother-daughter” houses, the conversion of space for an apartment (granny flats) and other structures converted to residences.

The well-known housing market issues were already driving some use of ADUs when legislation was enacted to support and advance the concept. Assembly Bill 68, passed in 2019, reduced ADU permit approval time from 120 days to 60 days and prevented municipalities from imposing lot size or parking requirements. Assembly Bill 881 further allowed property owners to build ADUs without living on the same property, enabling ADU investments.

In 2020, one in 10 new homes built in California was an ADU. ADUs accounted for 20% of new home construction 2023. That is likely to continue and increase as a trend supported by additional legislation. In October 2023, the Legislature addressed the issue of restrictions on the ability of ADU owners to rent the homes.  Assembly Bill 1033, allows Californians to buy and sell them as condominiums.

Property owners in participating cities will be able to construct an ADU on their land and sell it separately, following the same rules that apply to condominiums. A key provision of the law gives cities to opt out and continue to require rental. In terms of tax issues, ADUs will be treated as discreet units for purposes of taxes and utilities. A property will also have to form a homeowners association to assess dues to cover the cost of caring for the property’s exterior and shared spaces, such as the driveway, a pool or a common roof.

FLORIDA GAMING COMPACT STANDS

The Supreme Court rejected an appeal of a suit challenging the compact between the State of Florida and the Seminole Tribe. (see 11.6.23 MCN). The case has been making its way through the federal judicial system since the compact was executed. The plaintiffs – two competing betting companies – had failed to see the deal overturned through two appeals court panels including an en banc appeal. The companies in February filed a petition seeking review at the Supreme Court after the full appellate court refused to reconsider the panel’s decision.

Under the terms of the 30 year compact, the Seminoles agreed to pay Florida about $20 billion, including $2.5 billion over the first five years. The deal also authorized the Seminoles to offer craps and roulette at their casinos and to add three casinos on tribal property in Broward County. It also allowed pari-mutuels (like the plaintiffs) to contract with the Seminoles and share revenue from sports betting. In November the Tribe rolled out a sports-betting app and in December launched craps and roulette at its casinos.

The Seminoles began making payments to the state in January and have paid more than $357 million under the revenue-sharing agreement, including a payment made Monday. A rule was adopted by the U.S. Department of the Interior earlier this year that allows states to enter compacts similar to Florida’s with Indian tribes.

ELECTRIFICATION

The Pasadena (CA) Water and Power municipal utility announced the approval of two contracts for renewable power. A 10-year $47.1 million contract wind energy contract with CalWind Resources Inc., begins on May 1, 2025.  is for a 20-megawatt wind turbine facility named Wind Resource II Project located in Tehachapi, California.  A 15-year, $55.3 million contract with Glenarm BESS LLC, a special purpose entity created by EPC Energy Inc., is for a 25 MW battery energy storage system. Pasadena Water and Power’s 2023 Integrated Resource Plan which recommends installing substantial solar and battery resources within Pasadena.

This year’s budget/legislative season saw three fronts open up in the effort to restrict or eliminate gas stoves. California, Illinois, and New York considered bills which would have required warning labels on gas stoves. Legislative proposals in New York failed to gain support and the Illinois effort was equally unsuccessful. In New York, the originally proposed bill was based on U.S. EPA pronouncements that components of natural gas, nitrogen dioxide and carbon monoxide, are “poisonous” and could “lead to the development of asthma, especially in children.” 

California continues to look at a labeling requirement after the courts ruled that efforts by California municipalities to ban gas stoves were not legal. California’s proposed label originally cited the U.S. Environmental Protection Agency and a state environmental health agency saying stoves emit pollutants indoors at concentrations that exceed outdoor air quality standards. A pending bill was amended to remove those references.

COLLEGES

There has rightly been much focus on the operating difficulties plaguing smaller colleges. At the same time, many of the large state systems are under pressure as well. The University of California system has been dealing with a variety of job actions by faculty and staff. Now, Penn State is dealing with staffing and expense issues as well. In May of this year, it announced the University’s Voluntary Separation Incentive Program (VSIP).

It has announced that a total of 383 employees, or about 21% of those who were eligible, opted for the VSIP. Roughly 77% of the employees who took the offer were staff. The university said the dollar value of the salaries and fringe expenses associated with these 383 employees is $43 million. A budget deficit had climbed to $49 million. In exchange for their voluntary departure from the university, employees received a lump sum payment equal to a year’s salary.

Employees that were eligible for the program included tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. 

WATER

The Southwest Kansas Groundwater Management District was established by the State of Kansas to manage the use of groundwater pumped from the Ogallala aquifer. This massive underground water source has driven agriculture in the eight Ogallala states (Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming). It has long been recognized that groundwater is a finite resource and some areas have taken to concepts supporting reduced water use.

The District oversees groundwater usage and development in a 12 county area which is overwhelmingly agricultural. It has been a laggard in terms of encouraging conservation. Last year, Kansas lawmakers passed legislation squarely targeting the Southwest Kansas Groundwater Management District.

Crop irrigation accounts for 85% of all water use in Kansas—even more in western Kansas. Other districts have offered financial assistance to farmers investing in water-efficient irrigation systems and championed large-scale restrictions on pumping. GMD only spent 13% of its conservation-related budget between 2010 and 2022. This has raised concerns about District management.

Last year, in response to the criticisms, the district changed its financial statements, reporting fewer, broader categories. The new financial structure did not distinguish travel costs from other expenses. The travel is related to management efforts to build support for a pipeline to deliver Missouri River water from the east side of the state to its far west. The organization twice has trucked water 400 miles from the Missouri River to western Kansas in an effort to generate support for the idea.

As for conservation, Oklahoma allows farmers to use up to two feet of water each year on every acre they own. But usage is not monitored. Farmers report annual estimates of water usage. The state has not banned the drilling of new irrigation wells. Legislation passed this year that would require irrigators to meter their water use was vetoed by the Governor.

ROAD FUNDING AND DELIVERY FEES

In 2023, the Washington State Legislature enacted HB 1125, which included a budget proviso for a study on how a retail delivery fee could be implemented in Washington. The study must: Determine the annual revenue generation potential of a range of fee amounts; Examine options for revenue distributions to state and local governments based upon total deliveries, lane miles, or other factors; Estimate total implementation costs, including start-up and ongoing administrative costs; and Evaluate the potential impacts to consumers, including consideration of low-income households and vulnerable populations and potential impacts to businesses. The study should document and evaluate similar programs adopted in other states.

The study has now landed some two weeks before its deadline. Among other things the study found that the impacts will reflect the fact that households with an income above the statewide median tend to spend more on e-commerce than those below the statewide median, regardless of location. Generally, individuals from urban areas spend significantly more in the aggregate on e-retail purchases. Those who live in urban areas tend to spend more on online retail purchases than those from rural areas. New businesses or small businesses with gross revenues/sales less than $1 million in the previous calendar year will be exempt.

There are only two current comparables. Colorado, which enacted its fee in 2022, charges 28 cents on every delivery regardless of value. It generated $75.9 million in its first year for local and state uses, and clean transportation priorities. Businesses with $500,000 or less in sales are exempt. Minnesota enacted its fee in 2023 and it will be levied starting this July. The state will charge 50 cents only on deliveries of $100 or more. It will raise an estimated $59 million for cities and towns. The state exempts businesses with $1 million or less in annual sales.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

WHERE CONGESTION PRICING DERAILED

In the wake of the decision to “pause” congestion pricing, it has been useful to look at how the MTA plan stacked up against the three large international examples. One of the most glaring issues is the fact that the level of revenue to be raised and the length of time in a day that the fees would be in effect had a real impact on perceptions.

It was recently noted that the example most relied on in New York is London. London does generate some $500 million of revenue each year. But it does so by collecting the fee only during the day – M-F 7am to 6 pm; Sa-Su Noon-6 pm. Much opposition was reflective of the fact that the MTA fee would be discounted but all day. The number of workers who worked shifts through public safety and hospital jobs and relied on vehicles as bus service is sporadic at night is significant.

Industries which see most if not all of their activity after 6 pm represented a significant block of opposition. Broadway has yet to return to pre-pandemic levels of attendance and tourist and restaurant areas like the Theater District, Little Italy, and Chinatown all saw the charges as a real hindrance to their businesses. At the same time, lower Manhattan has been transformed into an evermore residential district and those residents were not to be exempted.

Rightfully or not (beauty is in the eye of the beholder) Long Island commuters were wary of paying fees into a system which they believe shortchanges them. Any transit funding increase or change in its mechanics gets caught up in the city vs. suburb fight for money. That gets exacerbated by the lack of significant train service into the City from counties in the MTA service district west of the Hudson River. (Full disclosure: I live in one of those counties.)

Many of those who live in those counties are uniformed public servants and retirees who form a strong political block. They looked at the congestion fee as a $4,000 hit to their after tax income. As they say, the math is compelling. Add that to an extremely competitive set of elections to the U.S. House of Representatives and the fees became toxic.

In the end, the MTA has got to admit that it is often its own worst enemy. It wanted the $1 billion annual revenue requirement established by the Legislature. That left little if any room for negotiation. That shifted attention from the environmental reasons for the fee and created a perception that it was a money grab. It further alienated groups like the disabled. By effectively holding ADA compliance and full access (Full disclosure: I have a disabled family member) hostage to the imposition of the fee, it highlighted its abysmal record of providing that access.

If failure is an orphan, this one has a multigenerational genealogy.

PUERTO RICO

In a decision with implications for bondholders across the municipal bond market, a federal appeals panel found that PREPA bondholders have a non-recourse claim on PREPA’s estate for the principal amount of the bonds, plus matured interest. It also held that this claim is secured by PREPA’s Net Revenues — as that term is defined by the underlying bond agreement — and by liens on certain funds created by that bond agreement. The Bondholders were appealing the Title III court’s findings that they lacked a security interest in PREPA’s current or future Revenues or Net Revenues; that any such interest was potentially avoidable under; that they had failed to state a claim for breach of trust; and that they were not entitled to an “accounting” of misappropriated PREPA moneys.

In the Title III proceedings, the judge estimated the size of the potential claims. In the Oversight Board’s view, the Revenue Bonds were non-recourse, so the Bondholders could only recover from their collateral, i.e., the moneys in the Sinking and Subordinate Funds. In the alternative, the Board and its allies argued that the Title III court’s $2.4 billion estimation should be affirmed. Finally, the Board contended that if there were a lien on Net Revenues, it would be avoidable as unperfected.

PREPA’s Revenues and Net Revenues are “special revenues” under the Bankruptcy Code. The Court found that as security for the Revenue Bonds, PREPA pledged the Net Revenues and not just those moneys that made it into the Sinking and Subordinate Funds. The Court then asked does the lien on Net Revenues also apply to future Net Revenues, i.e., Net Revenues that PREPA has not yet acquired? The Court concluded that the answer is yes.

Several courts have also considered the scope of a municipal revenue lien like the one in this case. And all of them have concluded (or at least implied) that a revenue lien can extend to revenues to be acquired at a later date. Puerto Rico law, the Bankruptcy Code, and prior case law all indicate that the Net Revenues that PREPA acquires in the future will be subject to the pledge of Net Revenues made by PREPA in the Trust Agreement.

The Court found that the Bondholders had a legal “right to payment” rooted in the covenants outlined in the Trust Agreement. Because the Revenue Bonds specify the amount that PREPA legally owes the Bondholders, there was no need to estimate the Bondholders’ “right to payment” under section 502(c).

What is the amount of the Bondholders’ claim on PREPA’s estate? The Court concluded that the proper amount of the Bondholders’ claim is the face value (i.e., principal plus matured interest) of the Revenue Bonds. According to that Trust Agreement contract, the face value of the Revenue Bonds (i.e., the principal plus matured interest) is just under $8.5 billion. So, that is the amount of the Bondholder’s claim on the Net Revenues. The Court expressly declines to tell the Title III court — in the first instance and without adequate briefing — how it should deal with the Bondholders’ Net Revenue lien during plan confirmation.

ELECTRIC VEHICLES

The United Automobile Workers union announced a tentative contract agreement at an Ohio factory making batteries for electric vehicles. The accord covers 1,600 workers at a Lordstown plant operated by Ultium Cells, a joint venture between General Motors and a South Korean partner, LG Energy Solution. It produces batteries for G.M. electric vehicles. If you remember, closures of General Motors plants especially a Lordstown car production plant were a major topic in the 2016 presidential campaign.

This announcement is a product of UAW efforts regarding their national contracts. When the plant opened in 2022 it was a non-union shop. They were brought into the U.A.W. under the terms of the national contract the union negotiated with G.M. last fall. That process was followed by negotiations around wages and working conditions specific to this location.

G.M. started production this year at a battery plant in Spring Hill, Tenn., and has another under construction in Lansing, Mich. The union said it planned to use this contract as a template as it negotiated local agreements at other battery plants that G.M. and several other rivals are building. 

Ford Motor plans two battery plants in Kentucky, one in Tennessee and one in Michigan. Stellantis, the maker of Chrysler, Jeep, Dodge, and Ram vehicles, plans two battery plants in Indiana. With the exception of one of the Ford locations, those plants involve joint ventures that were brought under the U.A.W. umbrella under the national contracts the union signed with Ford and Stellantis last fall.

This new plant is located adjacent to the aforementioned Lordstown plant. The U.A.W. said about 200 workers who had once worked at the Lordstown plant and had taken jobs at other G.M. locations would soon transfer to the battery factory so they could return to the area.

CALIFORNIA FOREVER

California Forever is the entity which has purchased some 50,000 acres of farmland in Solano County for the purpose of starting a new city from scratch. The proposal is for a city of some 400,000 all living and working there in a walkable environment. The plan requires a vote by County residents to approve the zoning changes which would be necessary to permit development. 

California Forever has now qualified its utopian city initiative for the November ballot. Voters will be asked to allow urban development on 27 square miles  of land between Travis Air Force Base and the Sacramento River Delta city of Rio Vista currently zoned for agriculture. The project has been controversial from the start as the group of sponsors used “cover” buyers to allow the land to be accumulated. Farmers unwilling to sell have been threatened with legal action. Polls have shown significant opposition to the plan.

That is what is motivating the sponsors to offer a giant youth sports complex; $500,000 in grants to local organizations; a pledge to create at least 15,000 jobs averaging $88,000 in salary; $500 million to assist with down payments for housing, scholarships and other benefits for residents; and $200 million to revitalize the downtowns of such nearby cities as Rio Vista, Benicia and Dixon.

COLLEGES

Moody’s Ratings has revised Nazareth University’s (NY) outlook to negative from stable and affirmed its Baa2 issuer and revenue bond ratings. The outlook revision to a negative from stable was largely driven by a multi-year trend of softening enrollment and declining revenue, contributing to weaker operating performance relative to historical levels for the foreseeable future. The College faces a high reliance on student charges, a small operating scale, and a high age of plant.

Union College is a small private, not-for-profit college located in Schenectady, NY. In fiscal 2023, Union generated operating revenue of $141 million, and it enrolled 2,072 full-time equivalent (FTE) students as of fall 2023. The College’s A1 rating was maintained but the outlook is now negative. The school faces the common demographic risks confronting all small colleges but its debt structure and projected operating pressure are all weighing on the credit.

Marshall University is the second largest public university in West Virginia with approximately 76% in-state students. In fiscal 2023, Marshall generated operating revenue of $292 million and for fall 2023 had total FTE enrollment of 9,716. Its rating was lowered from A2 to A3 by Moody’s. The downgrade is driven by a structural deficit which is likely to persist through at least fiscal 2026.

A key contributing factor to the deficit is the declines in enrollment and student revenue in recent years driven by weak in-state demographics including a projected decline in the number of high school graduates, low higher education attainment rates and a price sensitive student population. 

HOSPITALS

Community Health System (CHS) is a not-for-profit, tertiary hospital system located in Fresno, California. It operates three acute care facilities: Community Regional Medical Center (CRMC), CHS’s flagship tertiary/quaternary facility with 864-beds; Clovis Community Medical Center (CCMC), a community hospital in the neighboring town of Clovis with 352 beds; and The Fresno Heart and Surgical Hospital (FHSH), which operates 57 beds.

Moody’s recently affirmed its A3 rating on CHS’ debt but it changed its outlook to negative. Revision of CHS’s outlook to negative reflects normalized financial performance (absent non-recurring items) that remains well below historical levels together with ongoing headwinds that may make targeted improvements difficult to achieve, including a new California state law to go into effect next month that will raise the minimum wage to $25 over the next couple of years for most healthcare employees.  

Oregon Health & Science University (OHSU; Aa3 stable) and Legacy Health (A1 negative) announced an affiliation agreement. The two Portland-based organizations would create a large regional system with over $7 billion in operating revenue, 12 hospitals, 100-plus locations and approximately 30,000 employees.  OHSU is the state’s only academic medical center and medical school while Legacy operates an extensive network of tertiary medical centers, community hospitals and distributive outpatient sites.

HYDROPOWER

The U.S. Energy Information Administration released data showing the least hydropower was generated in the western United States during the 2022–23 water year (October 1 through September 30) since at least 2001. Western region hydropower generation dropped by 11% from the previous water year. The western United States—Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming, California, Oregon, and Washington—produced most (60%) of the country’s hydroelectricity last water year (2022–23).

A combined 37% of total U.S. hydropower capacity is located in Washington and Oregon.  Water supply was below-average in the Northwest region for the rest of the water year, which reduced hydropower generation. In the 2022–23 water year, 23% less hydropower was generated in Washington than the water year before, totaling 62.3 million MWh. Hydropower generation in Oregon also fell by more than 20% in the 2022–23 water year.

In contrast, hydropower generation grew in California last year. From December 2022 to March 2023, a series of atmospheric rivers drenched parts of the western United States, especially California, with record rain and snow. In the Colorado River basin, hydropower generation at the Glen Canyon Dam increased by 27% during water year 2022–23 compared with the water year before. However, water conservation efforts downstream at Lake Mead reduced water releases. The Hoover Dam, which forms Lake Mead, generated 11% less electricity in the 2022–23 water year than it did in the previous water year.

UPDATES

This week it was announced that the Gateway Tunnel project would receive an additional $6.88 billion federal grant to fund the project. The federal grant — the most ever provided to a mass-transit infrastructure project in the country — was the final piece of the funding puzzle for the long-delayed tunnel between New Jersey and Pennsylvania Station in Manhattan. The grant would increase the federal funding for the Gateway project to about $12 billion, about 70 percent of its estimated total cost. That total includes about $1 billion from Amtrak, which owns the existing tunnels and Penn Station.

The balance, along with any overruns, will be supplied by New York and New Jersey. Last week, the two states and the Port Authority received approval to borrow their shares of the project’s cost from the federal government. The work could begin as soon as this year and is scheduled to be completed in 2035.

The Central Florida Tourism Oversight District announced an agreement with a locked-in, long-term plan for expanding Disney World. At least for the next 15 years, the length of the new agreement, Disney can develop the resort without worrying about interference. It gives Disney the ability to build a fifth theme park, add three small parks, expand retail and office space and build 14,000 hotel rooms, for a resort total of nearly 54,000. The district noted that, under the agreement, Disney is obligated to spend at least $8 billion. 

California AB5 was passed in 2019 to classify ride share drivers as full employees with a minimum wage, workplace protections and other benefits. The law was immediately challenged by Uber and struck down by an appeals court after years of deliberation.  In an en banc appeal, an 11-judge panel of the 9th Circuit of Appeals reversed the first appellate decision, determining the law does not illegally single out transportation gig workers, but merely changes regulations for all independent contractors. 

The 2019 law was impacted by the approval of a statewide ballot measure Prop 22 in 2020. That allowed companies like Uber to consider their employees to be contractors. That measure is also being challenged in court, with a labor union arguing last week that it unjustly hampers future legislation.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News June 10, 2024

Joseph Krist

Publisher

CONGESTION PRICING CRASHES

With only four weeks until its expected commencement, Gov. Kathy Hochul is moving to delay the imposition of congestion pricing. The stated issue is concern over the impact on the revival of the Manhattan economy. There are still significant commercial and retail vacancies. Broadway has been slower to come back than was hoped. At the same time, a record number of shows are projected to open this fall. Restaurants, especially those in areas like Manhattan’s Korean and Chinese districts, have already been under pressure. They see a fair chunk of their demand tied to folks driving into Manhattan for dinner and/or a show.

A reversal would create a $1 billion yearly gap in MTA funding. Ms. Hochul suggested a tax on New York City businesses. Such a tax would require the approval of the Legislature. Procedurally, this would require either passage of new legislation this week or a summer special legislative session in Albany. It would also shift the burden of raising revenue to taxpayers in the City from a suburban and often out of state payor base.

Several pieces of litigation against the charge are making their way through the courts. Postponement of the charge may provide an opportunity for the litigation to be settled or adjudicated. It is clear that an opportunity exists to refine the plan and its implementation. And it provides a chance to reset the efforts at steering public opinion. The Governor also acknowledged that the approval of the scheme came before the pandemic in 2019. “Workers were in the office five days a week; crime was at record lows and tourism was at record highs. Circumstances have changed and we must respond to the facts on the ground.”

One first step might be putting a different face of the MTA forward. MTA head Jarod Lieber has been a poor front man with his bureaucratic demeanor and insistence that demands for exemptions should not be accommodated. An opportunity has been created for a complete rethink of the use of the city’s curb space. Things like delivery zones and delivery time limits can be revisited. Manhattan has always had traffic issues but the role of ride sharing services and the delivery economy in the current level of congestion cannot be ignored.

In the end, the MTA has to deal with the fact that it has no credibility with New Yorkers – historically corrupt, often inept, and opaque at best. At one point, it was estimated that the MTA loses as much to fare evasion as it would get in congestion pricing. The answer – spend more on fancier turnstiles but only explore remedies which don’t follow enforcement. Lost in all of this is that the facilities of the Triborough Bridge and Tunnel Authority have been subsidizing mass transit for years.

It comes down to the fact that the MTA is not trusted to execute the program or account for the money. It reflects the failure to explore alternatives. It reflects a lack of political will to create a tax structure that shifts the cost of the service. Now, MTA will use the pause to justify its dismal record of providing handicapped access (recent estimates put the achievement of full ADA access out until 2050), the ridiculous execution of the Second Avenue subway and a long history of delays and cost overruns.

BAY AREA TRANSIT FUNDING

Legislation dubbed the Connect Bay Area Act, would have authorized a November 2026 vote on a multicounty tax measure to raise as much as $1.5 billion a year to help pay for train, bus and ferry operations and for initiatives to help better integrate the 27 agencies that deliver those services. The bill would also pay for some street and highway work.

The proposal offered several alternatives: a half-cent sales tax, a parcel tax on property owners, a payroll tax to be paid by employers, or a future vehicle registration surcharge. The bill provided that tax proceeds would be funneled through the Metropolitan Transportation Commission. It guaranteed that during the proposed tax measure’s first five years, at least 70% of revenue generated in a county would be invested in projects and programs that benefited that county. That percentage would rise to 90% after the initial five years.

BART’s deficit in the fiscal year starting July 1, 2026, is currently projected at $385 million, with annual shortfalls of $350 million or more continuing into the foreseeable future. BART has said it may have to shut down two of its five lines, close some stations and run trains as much as 60 minutes apart. San Francisco’s Municipal Transportation Agency, which runs Muni transit service, expects its deficit to top $200 million during the same year. SFMTA chief Jeffrey Tumlin said earlier this week that major service cuts could begin next year.

The legislation was ultimately pulled from consideration in the current session. We are interested in the fact that Moody’s picked this week to announce a change in its sector outlook for the public transit sector. In the wake of the pandemic, the outlook had been negative. Now, the outlook has been upgraded to stable. Moody’s cites the overall recovery rate of 79% from the pandemic bottom. It also takes into consideration the impact of some funding increases in several jurisdictions.

Ultimately, it may be an issue of timing but the current period in the budget season is generating funding uncertainty. It seems a bit of a stretch to look at the “pause” of congestion pricing in New York and its impact on the nation’s largest transit system and see stability. We agree that there is a chance that some funding initiative will appear on the California ballot in November. Currently, BART and Muni will still be facing funding uncertainty. Chicago is dealing with operational issues and proposals to merge the city and commuter rail providers into a structure that looks more like the MTA in New York.

It is positive that there are funding initiatives making their way through legislatures in New Jersey and Pennsylvania. Our argument rests more on timing. All of this adds up to a fair amount of uncertainty for major issuers within the sector. Uncertain seems like a fairer assessment while these highly politicized situations play out.

Moody’s identified eight transit providers as being more fare-dependent pre-pandemic: New Jersey Transit, the New York MTA, The D.C.-area WMATA, Boston’s MBTA, the Chicago Transit Authority, the Southeastern Pennsylvania Transit Authority, the San Francisco Bay Area Rapid Transit District and the Bay Area’s Caltrain commuter rail line. Every one of them faces funding uncertainty. That’s a good chunk of the sector. A lot of that uncertainty will likely be resolved by the end of the budget process. A sector outlook change makes more sense then.

FUEL FOR THE NATURAL GAS DEBATE

Utilities and fuel producers continue to grapple with the need to reduce emissions while continuing to rely on some fossil fuels for generation. The most obvious cases are where large base load generators which run on coal are replaced with new base load generators. The debate stems from the proposed use of natural gas as a replacement. Gas has cost and relative emission production improvement over coal. This has not reduced opposition to new natural gas development and pipeline infrastructure.

Much of that opposition stems from the production of methane as a part of the process of extracting natural gas. After CO2 emissions, methane has been the next favorite target of environmentalists as a contributor to climate change. As large entities like the TVA and some municipal utilities consider the development of gas fired plants, the debate has increased. Some new data developed for and released by the US Environmental Protection Administration (EPA) will only fuel the debate.

The data shows that oil and gas extraction and refining emitted more greenhouse gases into the atmosphere than any other industrial subsector last year. At the same time, methane emissions from gas extraction fell by 37 percent. Overall greenhouse gas emissions, which count the industry’s considerable carbon dioxide releases, also fell, but by a more modest 14 percent.

The center of the gas extraction industry is the Permian Basin in Texas. Data specific to that area reflect Total hydrocarbon production in the Permian more than tripled from 2015 to 2022, and gas production rose by 163 percent. The overall emissions intensity of Permian energy production fell considerably. Methane intensity of gas extraction fell by 78 percent, and overall greenhouse gas intensity fell by 47 percent.

HOSPITAL PRESSURES CONTINUE

This was a rough week for hospital credits as they deal with the lingering impact of the pandemic on demand and utilization. A series of ratings actions showed that the pressures are across the board and not dependent upon location and/or size.

The DCH Health Care system in Alabama operates a 787 bed regional referral hospital in Tuscaloosa and two small facilities in the county. S&P announced that the Authority’s bond rating was lowered to BBB+ from A- and a negative outlook was maintained. The negative outlook reflects the continual operating losses and the expectation of weak operating performance over the outlook period, which could further negatively affect unrestricted reserves. The negative outlook also reflects DCH’s lower days’ cash on hand (DCOH) and reserves.

Mount Sinai in NY is a major provider which has been under continuing pressure as the result of the pandemic. In addition, it has been caught up in a regulatory problem over its decision to close one of its acute care facilities in Manhattan. These factors have combined to lead S&P to put the system’s low investment grade ratings on Credit Watch negative. “The CreditWatch placement reflects our view that there is at least a one-in-two likelihood of a downgrade within the next 90 days reflecting a trend of lower earnings at the flagship, MSH, and uncertainty around receiving necessary regulatory approvals to close Beth Israel Medical Center in July,”.

Baystate Medical Center in Springfield, MA is the major tertiary provider central and western Massachusetts. It’s has been long a highly rated credit. This week, S&P put a negative outlook on the system’s AA+ debt. “The outlook revision reflects our view of Baystate’s continued operating losses and thin maximum annual debt service coverage in fiscal 2023 that have continued into 2024. The outlook revision further reflects our view of lighter days’ cash on hand for the rating,”

COLLEGE CLOSING

The nearly 150-year-old University of the Arts in Philadelphia will close its doors as we go to press. “UArts has been in a fragile financial state, with many years of declining enrollments, declining revenues and increasing expenses.” Currently, it has 1,149 students and about 700 faculty and staff members.  The Middle States Commission on Higher Education, which accredited the institution, indicated on Friday that it had revoked the University’s accreditation immediately.

The closing was the result of a mix of cash flow constraints that are typical of schools like UArts, which depend on tuition dollars. In addition, UArts faced significant unanticipated costs, including major infrastructure repairs. The school was created by the 1985 merger of the Philadelphia College of Art and the Philadelphia College of the Performing Arts.

Tuition for the 2023-2024 year was $54,010. The pandemic was especially damaging for this and other institutions whose courses were much less viable online. Looking forward, UArts like the many other schools faces the looming demographic cliff which is clouding the outlook for reversing demand declines.

U.S. Census data based on the 2020 census shows project steady declines in the years ahead. In 2022, there were 17.4 million people in the U.S. aged 14-17. That number is already trending lower and is expected to decline annually through 2035. That would be an 11% decline in the number of prospective students from current levels.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

FLORIDA AND CHARTER SCHOOLS

Broward County Public Schools (FL) claims to have more than 49,000 vacant classroom seats this year. That is almost equal to the number – 49,833 – of students attending charter schools in the area. The school district has been experiencing steady declines in enrollments since 2010. Over the period since. enrollment in charters increased by nearly 27,000 students since 2010, according to Broward school officials.

Private school enrollment across Florida rose by 47,000 students to 445,000 students from 2019-20 to 2022-23, according to the latest data available from the state. Enrollment declines for Broward, Duval and Miami accelerated during the Covid-19 pandemic, which sent parents seeking new education choices for their children. Homeschooling increased significantly as this population grew by nearly 50,000 students between 2019-20 and 2022-23, totaling 154,000 students in the latest Florida Department of Education data.

Traditional public schools in the area are projected to enroll some 10,000 less students in 2024-25, compared with five years ago, according to Duval County Public Schools. Enrollment in traditional public schools across the state decreased by 55,000 students from 2019-20 to this year, state data shows. This is leading to a growing inventory of unused space and facilities. This at the same time that Florida schools are at the center of many of the cultural war disputes one sees in many places.

MILLIONAIRE TAX

An additional 4% charge on any income over $1 million a year and was approved by Massachusetts voters in 2022. The Tufts University Center for State Policy Analysis, in January 2022, released a report that found the tax would apply to less than 1% of Massachusetts households in any given year. The approval generated the usual cries of doom and gloom about the likelihood of taxpayer flight among those who might be impacted. The argument is raised just about any time now that an effort is made to raise rates for the highest tax brackets.

That notion is being revisited in light of the first year of income tax collections including the new higher top bracket. The Commonwealth Department of Revenue said that Massachusetts is on a course to collect some $1.8 billion from the surtax on the state’s highest earners through the first nine months of the fiscal year. That is some $800 million above prior estimates. Surtax collections must be used on education and transportation needs under the constitutional amendment that voters approved in 2022.

The fiscal 2024 state budget included agreements that any surtax revenues above the budgeted threshold would be placed into one of two accounts established as part of the tax approval. Fifteen percent of the overage is deposited into a savings account, set aside to maintain investments if surtax collections decline in future years. The other 85 percent goes into an “Education and Transportation Innovation and Capital Fund.”

Those funds are directed to several purposes “including, but not limited to, pay-go capital” or one-time projects “related to quality public education and affordable public colleges and universities and for the repair and maintenance of roads, bridges and public transportation,” 

SAN FRANCISCO SCHOOLS

Over the last few years, the San Francisco Unified School District has been best known for its role in the school renaming debate that was a part of the country’s post- George Floyd reckoning. Arguments over historical inaccuracies, name removals, and a host of other social concerns seemed to the main points of contention. They led to resignations and change to the school board. Given this and the other pandemic related problems which took such a toll on the City as a whole, it was inevitable that something would fall through the cracks.

On September 15, 2021, Fiscal Experts were assigned to the SFUSD by the California Department of Education. Recently, these CDE overseers drew attention to the SFUSD and its continuing financial decline. The State Superintendent noted that the SFUSD is projecting deficit spending in the unrestricted general fund for the current and two subsequent fiscal years. Without budget adjustments to bring the expenditures in line with revenues, the SFUSD will be unable to meet its financial obligations in the 2024–25 fiscal year. That creates a negative finding which supports state supervision.

In December 2023, the SFUSD adopted a Budget Balancing Solution Plan with the 2023–24 First Interim Report that included unrestricted general fund one-time reductions, $103.1 million of ongoing reductions for 2024–25, and an additional $88.8 million of unidentified ongoing reductions for 2025–26.

As a component of the oversight process, a Second Interim Report was issued which reflects that of the $103.1 million in expenditure reductions identified at First Interim for 2024–25, $28.3 million were not achieved and were added back to the unrestricted general fund for 2024–25. At the First Interim Report, the SFUSD projected estimated ongoing savings of $40 million from eliminating vacant positions in the 2023–24 fiscal year. As of the Second Interim Report, $15.8 million of the vacant positions were eliminated.

The SFUSD plans to achieve $29 million of savings in 2024–25 through changes to their staffing model for elementary, middle, and high schools. The SFUSD stated that these reductions would be achieved through layoffs and attrition. The SFUSD Board of Education adopted a resolution to issue layoff notices that included $14 million in estimated savings for certificated staff. The CDE has been informed that the SFUSD will no longer pursue these layoffs.

Statutory restrictions on debt issuance for school districts that have qualified or negative interim report certifications have their debt issuance limited. SFUSD may not issue, for the 2023–24 and 2024–25 fiscal years, certificates of participation, tax anticipation notes, revenue bonds, or any other debt instruments not requiring the approval of the voters, unless the State Superintendent of Public Instruction (SSPI) determines that repayment of that indebtedness is probable.

In spite of the report, SFUSD is expected to approve a ballot initiative for this November’s ballot to approve an $800 million bond sale.

MORE HOSPITAL BAD NEWS

Massachusetts-based Tufts Medicine confirmed plans to lay off 174 of its employees. Persistent capacity issues, high contract labor expenses and rising supply chain costs were the primary items cited by management. Tufts Medicine recorded a $171 million operating loss and 71 days of cash on hand at the close of its most recent fiscal year, which ended Sept. 30, 2023. This was an improvement over the prior year, when it recorded a $399 million operating loss. In February Fitch Ratings downgraded Tufts Medicine from “BBB” to “BBB-.

Pittsburgh-based UPMC is an integrated health system and one of Pennsylvania’s largest employers. Its provider, insurance and other business arms logged $27.7 billion of revenue across 2023 as volumes rose and insurance membership grew. In spite of the increases in utilization, the nonprofit reported a $198.3 million operating loss (-0.7% operating margin) last year as insurance claims expenses jumped 13.6% and labor costs rose 6.4%. It had posted a $162 million operating gain (0.6% operating margin) the year before.

Now it has brought in McKinsey as a consultant to help manage its “transformation”. If you’ve ever been in a McKinsey reimagination, you’re not shocked to see 1,000 layoffs announced. (1% of its 100,000-person workforce) It is after all what they do. UPMC is a $27 billion annual operation with operating revenues roughly split between its 40 hospital health services division, and its 4.2 million-member insurance services group. A third segment runs a division supporting development of commercial venture enterprises and an investment portfolio.

The system’s operations have been losing money. For the 2023 fiscal year, ended Dec. 31, the organization logged a $198.3 million operating loss (-0.7% operating margin) on revenue of $27.7 billion due in part to rising health plan utilization and insurance claims expenses. Its bottom line showed a $31 million loss, reflecting investment returns.

Relying on the investment portfolio and the risks which result were reflected when UPMC had recorded a $162 million operating gain across 2022 but a $1 billion net loss due to that year’s investment markets. It reported a $103 million operating loss (-1.4% operating margin) for its first quarter of 2024 and 103 days of cash on hand as of March 31.

Last week we documented the cyberattack on Ascension Health. Going into its fourth week, IT operations have been minimally restored but there remains no estimate as to full restoration. Systems that are currently unavailable include some electronic health records systems, some patient portals (which enables patients to view their medical records and communicate with their providers), some phone systems and various systems utilized to order certain tests, procedures and medications.

The cyberattack comes as the system faces an exodus of providers as the result of changes to Ascension’s structure which includes an investment vehicle and ownership of for-profit entities to provide for staffing and other services. It is a phenomenon that is increasingly shaping the industry as private equity takes an increasingly large position in the ownership of physician practices and other providers. These takeovers often lead to significant disruption to the provider base with expected negative impacts on service.

HIGHER EDUCATION MERGER

Marymount Manhattan began as a two-year women’s college in 1936, became a four-year school 12 years later and awarded degrees to its first male graduates in 1973. The college had about 1,450 students last fall, down from 1,915 in 2017. MMC has run annual deficits of more than $1 million a year since 2020 after posting a surplus of roughly $900,000 the year before. The board has cited declining enrollments and rising operating costs for an outlook that was “not sustainable”. The school has a $28 million endowment. 

Northeastern University (NU or NEU) is a private research university with its main campus in Boston. Established in 1898, it was founded by the Boston Young Men’s Christian Association as an all-male institute before being incorporated as Northeastern College in 1916, gaining university status in 1922. With more than 38,000 students, Northeastern is the largest university in Massachusetts by enrollment. Management has been pursuing a policy of expansion across the country through the absorption of smaller local institutions. It currently has “satellite” campuses in six U.S. cities and one each in Toronto and London.

Rather than close Marymount, that school decided that a merger represented the best chance of keeping it open. “Recognizing the significant headwinds facing small liberal arts colleges, MMC’s Board decided to pursue this path to ensure the continuation of MMC’s student-centered approach to education for generations to come,”.  The “path” is a merger with Northeastern.

Students enrolled and in good standing at the time of the merger will be eligible for automatic enrollment at Northeastern and can continue working toward completion of their intended degree program. MMC’s full-time faculty members at the time of the merger will become Northeastern faculty, receive one-year contracts, and be considered for available tenured, tenure-track and non-tenure-track positions. All staff employed by MMC upon the effective date of the merger will become Northeastern employees.

In 2022, Northeastern merged with Mills College in Oakland, California, providing the university with a comprehensive campus in the Bay Area.

PUBLIC TRANSIT’S CHALLENGE

Public transportation agencies kept many buses and trains running during the height of the pandemic, especially to support the travel of “essential workers,” but ridership and fare revenues plummeted. Public transportation agency budgets, particularly operating expenses, were supported by federal supplemental appropriations in FY2020 and FY2021 totaling $69.5 billion. This amount was about five times the annual federal public transportation support of $12 billion in 2019, the final full year before the pandemic, and more than three times the $19 billion coming from fares and other operating revenue.

In a survey of its members, the American Public Transit Association (APTA) found that about half of transit agencies and more than two-thirds of large agencies said they would experience severe budget problems (a so-called “fiscal cliff”) in the next five fiscal years (FY2024-FY2028). After declining through the late 1990s, the average operating cost per vehicle mile increased slightly from a low in 1999 through 2019. The operating cost per passenger trip (a measure of service consumed), however, has more than quintupled over this 50- year period.

Ridership rebounded to 79 percent of pre-pandemic levels in March 2024, according to the latest data from the American Public Transit Association (APTA). Public transit ridership was 7.1 billion total trips in 2023, a 16 percent increase from 2022 to 2023. Current data remains limited, but indicators in several metro regions point to transit recovery being led by trips to and from residential and commercial areas as opposed to office/work centers. According to the Federal Highway Administration, travel on U.S. roads and streets in 2023 was higher than 2019 levels by one tenth of one percent.

CARBON CAPTURE LEGISLATION

Illinois has enacted legislation regulating carbon capture pipelines. The final bill would establish a moratorium on new pipeline construction until July of 2026. The moratorium would expire on July 1, 2026, if the U.S. Pipeline and Hazardous Materials Safety Administration doesn’t finalize safety rules by then. The bill requires monitoring of injection wells for at least 30 years after they close, a process that must be approved by the state and federal government. It also grants the Illinois Commerce Commission expanded authority to impose fees and require certain safety models to be used during permitting for carbon sequestration and transportation projects.

The Illinois Farm Bureau, an interest group representing farmers and other large landowners, and the Illinois Soybean Association opposed the final bill, largely because of how it handles eminent domain. Under the proposal, the state’s Department of Natural Resources can issue a binding order on “nonconsenting” landowners to force them to let carbon sequestration companies use their land – specifically, the “pore space” thousands of feet underground – to store carbon dioxide. Companies would be required to give “just compensation” in exchange.

BATTERIES ON THE BALLOT

It’s pretty well agreed that a future electric grid which depends on renewables depends on storage. Storage requires batteries. Therein lies the rub. A series of incidents involving battery fires – large batteries for grid storage and small lithium ion batteries for electric bikes – has stoked fear over battery storage. This has sparked significant community opposition to efforts to site these facilities. It is a debate being played out in communities large and small.

The latest example is in California. Vistra Corp. has proposed a 600-megawatt battery storage project on a portion of the former generation site in Morro Bay, CA. It is already an industrial site even if it is on the coast including its three large smokestacks still standing at the generation plant. All of that would be removed and replaced by the battery storage. Project opponents say they’re concerned about its impacts on tourism and the potential for fires at the facility.

The project is currently in the draft environmental impact report stage, with that document open for public comments through this week. The project is awaiting consideration by the city’s planning commission and city council. Opponents want to take that approval power away. A ballot initiative on this November’s ballot would do just that.

It could all be for nought. Recent legislation that allows large battery storage facilities to opt in to an approval process from the California Energy Commission (CEC), instead of going through a local process, could provide a backup pathway to Vistra. 

In 2021, the city changed the land-use designation of the site of the power plant from “Industrial” to “Visitor Serving/Commercial”. The energy storage project is considered industrial so the city council would need to vote to change the designation to again allow industrial uses. The ballot measure proposes to freeze the current land-use designation of the property and a few others in the area. It would then require a majority of voters to approve another change in the land-use designation. 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

PUERTO RICO POWER PLAY

The U.S. government is spending over a billion dollars to accelerate renewable-energy adoption in Puerto Rico, including a $156.1 million grant through the Solar for All initiative that focuses on small-scale solar. Since the disastrous storms of the last decade exposed all of the weaknesses in Puerto Rico’s electric infrastructure. One of the easiest fixes available to address issues of both resilience and sustainability, has been rooftop and small scale solar (microgrids). As we have pointed out before, the island has both wind and solar resources in abundance.

In January, Governor Pedro Pierluisi signed a bill extending the island’s existing net-metering policy through 2031. Those rates have supported significant development of solar across the island especially in more isolated and usually poorer communities. As those resources come on line, it doesn’t help Puerto Rico Electric Power Authority (PREPA) to generate enough revenue to meet the demands of its creditors. Especially, creditors in the PREPA bankruptcy.

It is not any different from the situation many mainland utilities face as customers facing increasing rate demands gravitate to solar as a more reliable and often more economical choice. LUMA, the private entity which manages PREPA, estimates that some 117,000 homes and businesses in Puerto Rico were enrolled in net metering as of March 31, 2024, with systems totaling over 810 megawatts in capacity. 15,000 net-metered systems totaling over 150 MW in capacity were installed as of 2019 — the year Puerto Rico adopted its 100 percent renewables goal under Act 17.

Net metering was going to be evaluated under the terms of the January legislation but not until 2030. In April, the Financial Oversight and Management Board urged the governor and legislature to undo Act 10 to allow regulators to study net metering sooner. When that didn’t happen, the board made another appeal in a letter dated May 2, threatening litigation to have the law nullified. They want repeal to occur in the current legislative session ending June 30.

A two-year study overseen by the U.S. Department of Energy, known as PR100, which analyzed how the island could meet its clean energy targets. The study suggests that net metering isn’t likely to start driving up electricity rates for utility customers until after 2030, the year the Energy Bureau is slated to revisit the current rules. 

CARBON CAPTURE

The Department of Energy (DOE) obligated almost $1.4 billion across 654 research and development projects to support carbon capture, utilization, and storage (CCUS) and direct air capture (DAC) technologies from fiscal years 2018 through 2023. Nevertheless, according to the Congressional Budget Office, as of September 2023, only 15 facilities were capturing and transporting CO2 for permanent storage as part of an ongoing commercial operation.

The significant majority of DOE’s carbon capture funding. Specifically, FECM obligated almost $950 million, or 69 percent of DOE funding, to support 410 projects from fiscal years 2018 through 2023. 392 projects (about 96 percent) focused on technologies related to reducing emissions from coal and 18 (about 4 percent) from oil and gas.

Now the federal government is increasing its support for carbon capture. The Infrastructure Investment and Jobs Act provides approximately $12 billion for CCUS and DAC projects. This week, the third-largest “direct air capture” plant operating in the United States came on line. This one adjacent to a Google facility in Oregon is smaller than the other two projects – Global Thermostat’s plant in Commerce City, Colorado, and Heirloom’s plant in Tracy, California.

PORTLAND

I-5 Bridge – When construction starts on a new Interstate 5 bridge across the Columbia River in early 2026, drivers will begin paying tolls on the existing span between Washington and Oregon. Funding for the replacement has been a very contentious issue. Tolls are counted on to raise $1.2 billion for construction plus provide an ongoing stream of revenue for bridge maintenance and operations. Several possible rate scenarios are under review. These have one-way rates ranging from $1.50 to $3.55 with higher prices during peak travel times.

The Oregon Legislature will consider a possible appropriation of some $40 million to help the Port of Portland keep its container loading components open. (See 4.22.24 MCN) The Governor has included $35 million in her budget and proposes to request the remaining $5 million from the legislative Emergency Board at a meeting in September. Each would require approval from lawmakers. Earlier this year, Port leaders asked the Oregon Legislature for $8 million to support operations and were turned down.

Portland voters approved the extension of a local gas tax. The 10-cent-per-gallon tax funds street and sidewalk maintenance and safety projects across Portland. The city estimated the tax will cost the average Portland driver who uses gas-powered vehicles about $2.50 per month. The city’s gas tax was introduced in 2016, and renewed by voters in 2020. It has generated nearly $150 million for the transportation bureau over eight years.

MILEAGE FEES

The Mineta Transportation Institute (MTI) has released the results from its 15th annual survey in a series that explores public support for raising transportation revenue through higher federal gas taxes or a new mileage fee. The headline may be that for the first time a majority of respondents supported some form of mileage fee. In reality, the poll results indicated that support was soft in many ways.

A majority of respondents (51%) supported replacing the federal gas tax with a mileage fee where the rate would vary according to the vehicle’s pollution emissions.  “More than half of respondents supported not only the pollution-rate mileage fee but also a new ‘Business Road-Use Fee’ that would be charged to delivery and freight trucks (58%) or to taxis and ride-hailing vehicles (53%).

The problem comes from the fact that the least popular mileage fee option was a flat-rate fee on all travel. Support for this option was only 39%.” The trend line is positive. “Support for the flat-rate mileage fee grew from just 22% in 2010 to 39% in 2024. Similarly, support for the pollution-rate version grew from 33% in 2010 to 51% in 2024.” 

Other data indicated how uninformed people are about the realities of taxes and road funding. The survey also assessed public knowledge about federal gas taxes and support for the idea of raising the federal gas tax rate by 10 cents per gallon. Only 2% of respondents knew that the federal gas tax rate has not been raised in more than 20 years. Support for raising the federal gas tax has risen since 2010. 

Almost three-quarters of respondents supported raising the gas tax rate if the revenue would be dedicated to maintaining streets and highways (74% support). In contrast, far fewer respondents supported the same gas tax increase if the revenue were spent for undefined “transportation” purposes. 70% supported raising the rate if the revenue were dedicated for safety improvements. In contrast, only 35% supported the rate increase if the money were spent more generically “for transportation.” The majority also supported the concept of using some gas tax revenue to support public transit (71%).

NEW YORK ECONOMY AND BUDGET

Earlier this year City employment reached 100% of its pre-pandemic level. Following a gain of more than 77,000 jobs last year from the final quarter of 2022 to the final quarter of 2023 (Q4 to Q4), the Independent Budget Office (IBO) projects that the City will gain over 91,000 jobs in 2024. The mix of new jobs however, is not following trends seen pre-pandemic. This has implications for the lower end of the City’s economy. Certain lower-wage industries that provide key entry level positions, such as leisure and hospitality and retail trade, remain well below their pre-pandemic employment totals.

IBO does not expect the retail sector to reach its pre-pandemic employment in the foreseeable future, in part resulting from shifts in consumer spending away from brick-and-mortar retail to greater proportions of online purchases. At the same time, The stability of high-wage jobs during the pandemic, in conjunction with a stable outlook for Wall Street, indicates stability for the City’s tax collections and finances in the short run. The largest shares of IBO’s total tax forecast estimate are Real Property (44%), Personal Income (21%), General Sales (14%), and Corporate Taxes (9%), while the remaining taxes and audit revenue together reflect the remaining 12%.

So how does all of this impact the outlook for the pending FY 2025 budget? IBO anticipates budget surpluses exceeding the Administration’s Projections in 2024 and 2025 The higher 2024 surplus results from IBO’s forecast of approximately $129 million more in anticipated tax revenues and about $1.0 billion less in City spending than presented in the Executive Budget financial plan. With similar net tax and spending estimates as the Administration for 2025, using the 2024 surplus to pre-pay 2025 expenditures, IBO anticipates 2025 to also end with a surplus of around $1.1 billion.

IBO estimates larger gaps than the Administration. Starting in 2026 IBO’s projected gaps for 2026 ($6.2 billion) and 2028 ($6.0 billion) are well within the range that the City has closed in the past. IBO estimates a slightly larger gap of $7.9 billion in 2027 in part due to the Administration’s budgeted $1.0 billion in State funding for asylum seekers that the State has yet to commit to, which IBO estimates will be covered by City funds.

IBO anticipates substantially more funding will be needed, more than $605 million (all City funds) in 2025 for personnel costs across the uniformed agencies of Police, Sanitation, and Correction, largely to cover overtime costs. IBO estimates an additional $651 million will be needed from 2025 through 2027 to fully fund the current spending levels for the City Fighting Homeless and Eviction Prevention Supplement (City FHEPS) housing rental voucher program. To fund DOE programs previously funded by Federal Covid-19 aid, IBO estimates an additional $187 million will be needed in 2025 and $505 million in each of the following years.

NATURAL GAS AND CLIMATE

The Government Accounting Office (GAO) was asked to examine pollution from peakers across the nation. Those are plants designed to supply power during spikes in demand. There were 999 peakers in the U.S. in 2021, according to GAO’s analysis of the most recent Environmental Protection Agency (EPA) data. In 2021, peakers accounted for 3.1 percent of annual net electricity generation and 19 percent of total designed full-load sustained output for all power plants. The expansion of this generating source is being challenged across the country.

One reason is that GAO found that when operating, peakers emit pollutants like those from other power plants that use fossil fuels, such as nitrogen oxides and sulfur dioxide. According to EPA data, peakers operate less frequently overall than non-peakers, but when they do operate, they emit more pollution. A second reason is that GAO found that historically disadvantaged communities (i.e., census tracts with higher percentages of historically disadvantaged racial or ethnic populations) are associated with being closer to peakers. 

TRANSIT’S DILEMMA

A new report from a conservative research organization highlights a phenomenon plaguing many transit systems serving multiple jurisdictions. Coming out of the pandemic, these systems were confronted with a landscape that they did not design. The declines in ridership due to limits on economic activity were one thing. The move to remote work and the impact on ridership is making it’s true impact harder to emerge. There are signs.

There is a disconnect between ridership and funding sources in many metropolitan area transit grids. The ratio of operating fares to operating expenses has always varied and New York (at some 50%) was always an outlier in terms of how much of its revenue was supported by fares. The more typical setup was a funding source – often a sales tax – collected across multi-jurisdiction service areas. It worked well until the pandemic.

Now that sort of funding structure is being questioned in many areas in terms of both maintenance of existing systems as well as expansion of new systems. Suburban residents who have become less reliant on mass transit for basic commuting seem to be taking a different view. It is seen as harder to justify support for a system which holds down fares through other revenues.

Colorado just enacted a new tax on the fossil fuel industry that is projected to produce $285 million to fund mass transit expansion. That led to the release of the report. The report stated ridership decreased 46% and the operating budget increased 3% between 2019 and 2022. The system’s operating budget increased from $477 million in 2014 to $856 million in 2023 and its proposed budget for 2024 is $1 billion. Only 4.4% of the district’s operating costs were covered by fares as of Jan. 31, 2024.

From 2020 through 2022, 66% of the system’s revenue came from sales and use taxes in participating counties. Federal grants provide approximately 25% of its operating costs.

ASCENSION HEALTH

The issue of cybersecurity is back in the spotlight as the result of ransomware attacks on healthcare facilities, providers and insurers. The biggest current situation involves Ascension Health and its 140 national hospital system. An ongoing ransomware attack against Ascension has moved basic patient care to pre-computer conditions. The attack has slowed It’s an ongoing debate operations, limited utilization and revenues.

This is the second major ransomware attack against a healthcare entity. Earlier this year there was a successful attack on United Health Care’s Change Healthcare. Change handles one-third of the nation’s patient records. The threat of the release and/or misuse of that data has been an often effective cudgel to be wielded by attackers.

One has to ask if United Health Care’s decision to pay a $22 million ransom encouraged future efforts. It is an ongoing debate with arguments on both sides. Ascension was hit as it was in the midst of an improving financial trend. Ascension reported income from recurring operations of $15 million for the nine months ended March 31, 2024 as compared to a $1.1 billion loss from recurring operations for the comparable prior year period.

Additionally, Ascension’s recurring operating performance for the three months ended March 31, 2024 improved $622 million over the comparable quarter in the prior year. For Q3 FY24 YTD, Ascension experienced an increase in overall same facility volume over the comparable period in the prior year, most notably driven by total inpatient admissions, emergency visits and total surgery visits.

Ascension’s net income for the three months ended March 31, 2024, including both operating and nonoperating items, was $581 million which represents a $1.3 billion turnaround from the same period in the prior year. For the nine months ended March 31, 2024, Ascension’s net income improved $2.2 billion over the prior year. It remains to be seen when systems will be restored and how much of an ultimate cost the system winds up bearing.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

NYC TAX GIMMICK

The average single family New York City homeowner pays $1,088 a year for water. Landlords pay for water, but pass along the costs to tenants. The increase, if it goes through, would amount to another $93 a year on water bills, according to a proposal acquired by The New York Times. We do not see this increase by the city as being a real credit issue. Rather, it is an indicator of the policy gap between the Mayor and the City Council. Neither want to raise taxes reflecting the sway of outer borough homeowners and the large commercial real estate interests which are heavy sources of campaign money.

It is a sign of the Mayor’s weakening political outlook and the fact that he is up for reelection in 18 months. He did get control of the schools from the legislature in an unexpected win for the Mayor. The period between now and the 2025 mayoral election will be a difficult one as COVID money will be effectively gone and the impact of migrants, homelessness and crime will continue to drive spending.

While the Mayor is proposing new taxes (no matter what he calls it), the NYC Independent Budget Office (IBO) has released data indicating that the City may have more money than it thinks. IBO estimates the City will spend $800 million less on Citywide staffing costs over the rest of FY 2024. This is the largest contributor to IBO’s $1.1 billion surplus projection. IBO’s estimates costs associated with asylum seeker services to be $3.3 billion less than what the Administration is projecting.

We are not arguing about whether the sky is falling. We just don’t see a stable current outlook for the city’s credit.

ILLINOIS BUDGET

The Civic Federation of Chicago has taken a look at the Governor of Illinois’ proposed budget. It notes that the proposed FY2025 budget represents the first year the State has had an initial budget deficit to close since the start of the pandemic. Based on current projections, the State’s revenues are expected to come in lower than projected expenditures in FY2025, resulting in a deficit of $970 million. The Governor’s proposal introduces a number of tax changes and enhancements that would close the budget deficit if approved by the General Assembly, thereby bringing the budget into technical balance. 

It is far from certain that the Legislature will support some new taxes. The Governor has asked agency leadership teams to prepare for a budget scenario with $800 million less in revenue. The $52.7 billion proposed General Funds operating budget is a 4.5% increase from estimated year-end FY2024 spending of approximately $50.4 billion—excluding FY2024 supplemental appropriations of $1.2 billion. Agency spending (excluding pension contributions and transfers out of the General Funds for debt service and other purposes) will increase by $1.9 billion, or 4.9%, from the FY2024 year-end estimate to $40.4 billion.

General Fund revenues are proposed at approximately $53.0 billion for FY2025, an increase of $779 million, or 1.5%, from the FY2024 year-end estimate of $52.2 billion. The State is projected to end FY2025 with a $128 million surplus after a proposed $170 million contribution to the rainy day fund. The Governor’s proposed budget fully meets the State’s 50-year pension funding plan by making the statutorily required General Funds pension contribution of $10.1 billion in FY2025. It also proposes increasing the 50-year funded ratio goal from 90% to 100%, which will add three additional years to the funding payment plan and extend its end date from FY2045 to FY2048. 

MISSISSIPPI MEDICAID

In February, the Mississippi House passed a bill that would offer coverage to people with incomes up to 138 percent of the federal poverty level, or just over $20,000 a year for a single person. The bill included a work requirement, but it also contained a provision ensuring that the expansion could move forward if the federal government rejected the work requirement. When the bill moved to the Senate, only a scaled back measure was approved.  The Senate version limit eligibility to people below the federal poverty line. The Senate version would have taken effect only if the Biden administration allowed the work requirement.

Early last week, an agreement between the chambers was released: Coverage would be extended to people with incomes up to 138 percent of the federal poverty level, as called for under the Affordable Care Act, but new recipients would be required to work at least 25 hours a week to get benefits. The work rule would likely have been a non-starter as has been the case in courts throughout the country. Nevertheless, it was clear that nothing would get through the Senate without work rules. This moved the House Speaker to announce that he wanted to put the question directly to voters. “It became apparent that opinions still differed on the best way to address our health care crisis,” he said in a statement.

He proposed a two-part ballot initiative that would ask residents if they supported Medicaid expansion, and if so, whether it should include a work requirement. But the suggestion was dismissed by state senators.

COLLEGES

As is often the case in the wild, it’s the smaller members of the herd who become prey. This is becoming increasingly true in the small private college sector.

On April 25, the University of Saint Katherine, an Orthodox Christian college in San Marcos, California will close at the end of the spring 2024 semester. Founded in 2010, its narrow focus limited demand. Those limits were amplified by the pandemic. Now, the institution was no longer able to meet its financial obligations due to “a steep shortfall in operating cash.”

And on April 29, Wells College in Aurora, New York revealed it would be closing at the end of the current semester, after 156 years of operation. Wells was for much of its history a women’s college. Enrollment had fallen from about 500 students several years ago to 357 in fall 2022, it lost money in five of the last 10 available fiscal years.

The cost pressures continue at institutions of all sizes. Pennsylvania State University is offering buyouts to employees at its Commonwealth Campuses. Staff that are eligible for the program include tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. The primary reason for the offer is that “enrollment has declined significantly at the Commonwealth Campuses, in aggregate, over the past 10 or so years while the number of faculty and staff at the campuses has remained relatively flat.”  

CALIFORNIA WATER

The 2023 Water Year (WY) — which spanned from Oct. 1, 2022, through Sept. 30, 2023 — brought 4.1 million acre-feet of managed groundwater recharge and a total rise in groundwater storage of 8.7 million acre-feet, according to the California Department of Water Resources. The 4.1 million acre-feet recharge volume was equivalent to the entire storage capacity of Shasta Lake, the largest above-ground reservoir in California. Of the total recharge amount, 93 percent — or 3.8 million acre-feet — occurred in the agricultural center of the state – San Joaquin Valley.

Although WY 2023 ranked as the 8th wettest year in the last 50 years, with nearly 100 percent recovery of surface water reservoir levels, long-term groundwater storage in aquifers remains in a deficit due to decades of pumping that often exceeded the replenishment. In WY 2023, increased surface water supply led to a significant reduction in statewide groundwater extraction, amounting to a total annual extraction of 9.5 million acre-feet, a stark contrast to the 17 million acre-feet extracted in WY 2022.

CALIFORNIA TAX INITIATIVE

A ballot initiative, championed by the California Business Roundtable and funded largely by real estate interests, would require voters to approve taxes passed by the Legislature and would raise the voter-approval threshold for some local taxes to two-thirds. It would also dictate that the Legislature must approve fees that the administration can currently impose and could invalidate some already-passed taxes unless they are re-approved under new rules. The deadline to remove qualified measures is about seven weeks away.

CALIFORNIA BUDGET

Governor Gavin Newsom released his May Revision proposal. The Governor’s revised budget proposal closes both this year’s remaining $27.6 billion budget shortfall and next year’s projected $28.4 billion deficit. The revised balanced state budget cuts one-time spending by $19.1 billion and ongoing spending by $13.7 billion through 2025-26. This includes a nearly 8% cut to state operations and a targeted elimination of 10,000 unfilled state positions.

The Governor points to two primary factors pressuring the budget. First, the state’s revenue, heavily reliant on personal income taxes including capital gains, surged in 2021 due to a robust stock market but plummeted in 2022 following a market downturn. While the market bounced back by late 2023, the state continued to collect less tax revenue than projected in part due to something called “capital loss carryover,” which allows losses from previous years to reduce how much an individual is taxed.

Second, the IRS extended the tax filing deadline for most California taxpayers in 2023 following severe winter storms, delaying the revelation of reduced tax receipts. When these receipts were able to eventually be processed, they were 22% below expectations. Without the filing delay, the revenue drop would have been incorporated into last year’s budget and the shortfall this year would be significantly smaller.

The structure of the state’s tax scheme which depends on a few large earners and their capital gains has played a role in the deficit calculations. Capital gains tax revenues that exceed eight percent of total general fund revenues are deposited into its Budget Stabilization Account (BSA). In 2021 capital gains realizations hit an all-time high of $349 billion. Conversely, the May Revision forecast projects that capital gains realizations fell to approximately $156 billion in 2022 and $137 billion in 2023.

The May Revision maintains the Governor’s Budget withdrawal of approximately $12.2 billion from the BSA, as well as $900 million from the Safety Net Reserve. However, the May Revision spreads the use of the BSA withdrawal over two fiscal years, utilizing $3.3 billion in the 2024-25 fiscal year and $8.9 billion in the 2025-26 fiscal year. This will leave a balance of $22 billion in the BSA. Nonetheless, the Revision includes some $8.2 billion of spending cuts. They will generate negative responses especially for their impact on education

The Revision includes a reduction of $510 million in ongoing General Fund support for the Middle Class Scholarship program; reduction of one-time $72.3 million General Fund in 2023-24, $348.6 million General Fund in 2024-25, and $5 million General Fund in 2025-26 for school-linked health partnerships; an ongoing reduction of $80.6 million General Fund to reflect the deactivation of 46 housing units across 13 prisons, totaling approximately 4,600 beds. The May Revision includes additional and adjusted support from revenue sources and borrows internally from special funds.

ESG IN COURT

An Oklahoma County District Court Judge Sheila Stinson issued a temporary injunction blocking an Oklahoma state law which would prohibit state agencies from investing with financial firms that boycott energy companies for no “ordinary business purpose,” because the companies engage in “fossil-fuel-based energy” and do not intend to meet environmental standards.

NEW YORK STATE CANNABIS

It has been evident merely from empirical evidence that the rollout of the legalization of cannabis in New York State has been a “disaster”. A new report from the State Office of General Services documents exactly how much of a disaster it is. Some 90 percent of applicants for cannabis businesses had failed to secure licenses. There is a waiting list includes 1,200 business that submitted applications last fall.

Here’s where the process made things worse. In order to have an application reviewed, an applicant had to spend thousands of dollars to secure properties where they intended to set up shop. That 1,200 applicant waiting list was a huge hurdle as the cannabis agency had the capacity to vet only 75 applications at a time. The execution of the approval process was inept as the regulators also denied an additional 309 applications without telling the applicants, some of whom have waited almost two years for a decision.

The agency itself is a bureaucratic nightmare. The responsibility for vetting license applicants is spread across four units of the agency, each with its own spreadsheet for tracking applications. Most other agencies that deal with licensing have a single person assigned to each license. At least nine staff members touch each cannabis application. But no one is responsible for seeing them through to completion. There are eight senior officials who report directly to the executive director but enforcement and licensing, fall to just two of them.

It was announced that the current head of the agency would not have his appointment renewed.

CALIFORNIA AND FIXED ELECTRIC CHARGES

The California Public Utilities Commission approved a plan which will apply to the rates charged by investor-owned utilities. Starting next year, most customers of those companies will be required to pay a $24.15 monthly charge. Low-income customers will pay $6 to $12 a month. The revenue from the fixed charge would be paired with a roughly 20 percent reduction in rates.

The change comes in the wake of seriously reduced net metering payments which have negatively impacted growth of residential solar. The lowering of net billing and the imposition of fixed rates reflect the reality that the investor-owned utilities are transferring more financial risk to ratepayers and away from stockholders. It also coincides with an increasing number of findings of fault by the IUOs in association with wildfires.

DALLAS TRANSIT AND THE CITY’S BUDGET

Dallas Area Rapid Transit (DART) collects a 1% sales tax in all 13 of its member cities. The transit agency collected over $400 million in Dallas annually for the last two years, sales tax data shows. Now some Dallas City Council members are looking at that revenue stream and asking why it should not be used to fund general pension funding requirements.

The city faces a $3 billion shortfall in its police and fire fund, which administers the pension program for over 10,000 current and retired officers. The pension fund for civilian employees also suffers a $1 billion shortfall, according to city officials. In the past, city officials have considered liquidating more of its real estate portfolio to put more cash into the funds. They have also recommended seeking voter approval to change contribution rates for the employees’ retirement fund.

Pressure to address the pension problem stems from the fact that the City must present a plan to the State to fund the pension shortfalls over a thirty year period. The state legislation requiring the plan was passed in direct response to funding pressures which potentially would impact pension payments. Holding taxes down won’t fund the pension problem.

POPULATION

Large cities in the Northeast and Midwest grew in 2023, reversing earlier population declines, according to data released by the U.S. Census Bureau. Cities with populations of 50,000 or more grew by an average of 0.2% in the Northeast and 0.1% in the Midwest after declining an average of 0.3% and 0.2%, respectively, in 2022. Those in the West went up by an average of 0.2% from 2022 to 2023. Cities in the South grew the fastest – by an average 1.0%.

San Antonio, Texas, added more people (roughly 22,000) than any other city in 2023, reclaiming its No. 1 spot on the list of gainers and pushing it close to the 1.5 million population milestone. Detroit gained some 2,000 residents and while the absolute number is nit large, the breaking of a multi-decade trend is. In Chicago, losses continue but at a slowing rate. It remains the nation’s third largest city. New York, New York, remained the nation’s largest city as of July 1, 2023, with almost 8.3 million people, followed by Los Angeles, California, which reached nearly 4 million people.

The nation’s housing stock grew by about 1.6 million units between July 1, 2022, and July 1, 2023, reaching a total of 145.3 million. The 1.1% increase was nearly the same as the 1.2% increase between 2021 and 2022. California had the largest number of housing units (14.8 million), followed by Texas (12.4 million) and Florida (10.5 million). Falls Church, Virginia, was the fastest-growing county; its housing stock increased by 13.5% between July 1, 2022, and July 1, 2023, followed by Rich County, Utah (8.5%), and Jasper County, South Carolina (7.1%). Wasatch County, Utah, and Billings County, North Dakota, were tied for fourth place with 6.1%.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

TRI STATE LOSES LARGEST PARTICIPANT

This week, the electric cooperative United Power will officially end its 7 decade relationship with Tri-State Generation and Transmission. United Power must make a net payment of $627 million to end its contract early. That number was the result of a court-mandated recalculation of the exit fee required by Tri State. The Federal Energy Regulatory Commission that came up with a formula for calculating the exit fees of Tri-State members who want to break their contracts. Initially, Tri State asked United for $1.2 billion. A major sore spot for United Power and the La Plata Electric Association in Durango is a cap of 5% on the amount of energy that cooperatives can generate on their own. 

The changes are being driven by the cooperative’s larger customer as much as anything. “We have industrial and commercial members who want a different fuel mix in a quicker time frame,” according to Tri State management. Tri-State has been working with its member cooperatives on a contract change that would allow them to get more of their electricity from other sources. Plans filed with state regulators call for Tri-State to get 50% of its power from clean-energy sources in 2025 and 70% by 2030. In addition, the company expects to cut its greenhouse gas emissions in Colorado by 2030 by 89% from 2005 levels.

United Power will still be paying to use Tri-State transmission lines and will buy roughly 30% of its power from the utility. Gabriel said United Power has signed four contracts with Tri-State, one of which will run for 20 years. United Power provides electricity to about 300,000 people with demand growing from 8% to 9% a year.

KENTUCKY COAL VS. JOBS?

For decades, northern Kentucky has had a significant aluminum smelting industry. It benefitted from an availability of locations for plants as well as access to coal for low-cost power and the Ohio River for transportation. It comes as no surprise then that Century Aluminium would like to build its plant in Northeast Kentucky. Century is the largest producer of primary aluminum in the United States. Like other entities in energy intensive industries, Century is under pressure to reduce the carbon footprint associated with its smelter operations.

Century already operates a smelter in Sebree, KY and has an idle smelter in Hawesville, KY. The new plant was selected for a cost share of up to $500 million, pending award negotiations, from the U.S. Department of Energy to support the proposed project as part of the Biden administration’s efforts to decarbonize key U.S. industries. There are only four operating primary aluminum smelters left in the U.S., and Century’s proposed plant would be the first built in 45 years.

According to the Department of Energy, Century’s new smelter would lower emissions by 75% relative to a traditional smelter due to “energy-efficient design and use of carbon-free energy.” It is the term carbon-free energy that is causing concern that the company might not be able to obtain sufficient clean power to allow the proposed plant to meet those emissions benchmarks. It will create 1,000 permanent jobs represented by the United Steelworkers union, and 5,500 additional construction jobs. Salary and benefits packages for workers at the smelter are expected to be over $100,000 annually, according to the company.

The issue comes up after coal advocates in the Kentucky legislature passed several bills aimed at federal environmental regulatory actions and slowing down the process of closing coal fired generation.  Bills creating a new review board to analyze fossil-fuel power plant retirement decisions became law after the legislature overrode a gubernatorial veto. A second bill giving $3 million to the State Attorney General office from the state’s Budget Reserve Trust Fund or “rainy day” fund to create an “electric reliability defense program” also made it past the veto process. The money is intended to fund litigation challenging the recently published rules on coal fired power generation from the EPA.

While this is all unfolding, Louisville Gas and Electric Co. and Kentucky Utilities Co. (LG&E and KU) announced that they will replace two aging coal generation units at Mill Creek Generating Station in Kentucky—a combined 600 MW—with a 645-MW GE Vernova hydrogen-ready 7HA.03 gas turbine. The utilities have made it clear that they are making market based rather than ideology based decisions as to how to develop their generation base.

NUCLEAR

Georgia Power announced that Votgle 4 is in full commercial operation, seven years later than initially forecast. Their total price tag also blew past the original cost estimate of $14 billion to around $35 billion. Georgia Power owns the largest share in the Vogtle expansion with 45.7%, followed by Oglethorpe Power (30%), the Municipal Electric Authority of Georgia (22.7%) and Dalton Utilities (1.6%). The milestone allows the Votgle assets to be fully absorbed into customer rates. Estimates put the additional residential cost at about $14 per month for 1,000 kwh of power.

A federal appellate court has rejected environmentalists’ challenges under the National Environmental Policy Act (NEPA) and other laws to a decision by the Nuclear Regulatory Commission (NRC) to provide an exemption to a license renewal application deadline for the continued operation of California’s Diablo Canyon nuclear power plant, finding the agency did not act arbitrarily or capriciously. 

CHICAGO TRANSIT

Legislation has been introduced by two Illinois legislators which would merge the Regional Transit Authority (RTA), the Chicago Transit Authority (CTA), Metra and Pace. The idea is to reduce administration, competition for funding and an unwieldy governance structure. It comes in the wake of recent estimates of a $750 million deficit to result from the end of COVID related federal aid.

Governance of the new body would be in the form of nearly 20 voting members, down from the nearly /50 split between the current agencies. Three members would be appointed by the governor. The mayor of Chicago and president of the Cook County Board would appoint five each. One member would be appointed by each of the county executives of DuPage, Kane, Lake, McHenry and Will counties. 

Six non-voting members would also join the board: the secretary of the Illinois Department of Transportation, the chair of the Illinois Tollway, an organized labor representative chosen by the governor, the chair of the agency’s citizen advisory board and a representative each for the business and disabled communities, chosen by the board. This is considered streamlining by Chicago standards.

It is not clear what the impact of these proposed changes would be on the credit supporting debt issued by the agencies.

TRANSIT FUNDING CHALLENGES

In 2020, voters in Austin, TX approved the Austin Transit Partnership (ATP) — a local government corporation created to finance and oversee the development of a light rail system in the city. The vote also included approval of local taxes to support the plan. With that support, the ATP thought it would be prudent to go to the Texas courts to preemptively obtain validation for bonds it proposed to issue.

That process is now being challenged by Texas’ ideological firebrand, Ken Paxton. The Attorney General’s Office has to sign off on all bonds issued by local jurisdictions like cities, counties and local government corporations like ATP. He has assembled a group of plaintiffs to object to the validation of the bonds. The issues seem to come down to the meaning of words with the parties taking opposite views of what the law would require.

Property taxes in Austin are comprised of two components – maintenance and operations (M&O) rate and a levy for debt service. Raising the debt related rate requires an election and can only be done for a fixed dollar amount. The city argues by transferring M&O property tax revenue to a local government corporation like ATP effectively allows ATP to decide what the money can legally be used for. Once ATP receives the cash, it is “contract revenue,” not tax revenue, and can be used to pay down debts.

The City also argues that language in a resolution passed by the Austin City Council before the 2020 election called a “Contract with the Voters“, which says any changes to Project Connect require approval of the council, CapMetro and ATP board. All three bodies voted to approve the significant changes to the plan in 2023.

In 2021, the Colorado legislature enacted bills to[JK1]  implement Proposition 117 to fund transportation projects throughout the state. Just like in Austin, conservative opponents are relying on interpretations of the law to halt funding. In this case, the restrictions in question are seen as violating the state’s TABOR restrictions which limit taxes.

The law created separate fees for a number of transportation-related activities like Uber and Lyft rides, food delivery and fuel. The revenue from each fee was then directed to separate government-owned businesses known as enterprises, each of which was individually projected to take in less than the $100 million limit over five years set out in Proposition 117. At issue is whether the law requires the fees to be evaluated for compliance as a whole or whether each fee is valuated individually.

In ruling against those challenging the fees, a district court judge found that each enterprise and fee had “differing purposes” and thus did not need to be combined. The bill’s sponsors are clear that they created separate fees and enterprises specifically to conform to Proposition 117. 

COLORADO BALLOT INITIATIVE

Protect Colorado, is an advocacy group funded with millions from Chevron Energy, Occidental Petroleum Company and other smaller oil and gas companies operating in Colorado. It has submitted a ballot initiative to be voted on in November designed to make it harder for voter initiatives to make it to the ballot. To that end, it developed Initiative 77.

If approved, Proposed Initiative 77 would require all future ballot measures to appear below an extensive economic impact statement, which must include the estimated effect on jobs, state and local tax revenue and the overall state gross domestic product. The Colorado Secretary of State’s Office announced the backers had collected enough signatures to qualify for the ballot.

The measure would require the legislature’s chief economists to review potential economic impact statements submitted by “any interested party.” Within five days, the economist must write a summary with a range of all the qualifying statements. Protect Colorado is currently collecting signatures for another initiative to ban state and local governments from restricting “energy choice,” which could block policies to cut climate-warming emissions by limiting natural gas access in new buildings. 

CALIFORNIA POPULATION

A rebound in legal immigration and drop in Covid-19 deaths drove an increase of 67,000, or 0.2 percent, in 2023 in California’s population. The data provides a contrast to the popular notion that folks are pouring out of California as fast as they can. California still lost more residents to other states than it gained from them — as has been the case for two decades — but the number of people leaving for other parts of the country fell to pre-pandemic levels. The net loss of California residents to other states fell from a peak of 356,000 in 2021 to 91,000 in 2023.

One of the things lost in much of the commentary on California’s population is that the phenomenon of residents leaving for other states is common to immigration centers like California and New York. Those places are the first stop for immigrants who often move through to other destinations. The housing situation would likely accelerate that movement of new immigrants inland. California added 116,000 units, or 0.8 percent of the state’s inventory. Around half of those were single-family homes, while most of the rest were multi-family homes.

CLIMATE AND THE MILITARY

It’s not the first thing that comes to mind when one thinks about things military but it turns out that the US DOD has been out front in many ways on the issue of climate change. The location of many facilities often puts them at risk of things like rising sea levels and flooding. To that end, DOD has been assessing the resilience of many of its installation for a decade.

The Air Force Research Laboratory is the primary scientific research and development center for the Department of the Air Force. AFRL officially launched in 1997 to consolidate the four former Air Force laboratories and the Air Force Office of Scientific Research. Its primary focus is on weapons development but its total scope includes some 40 areas of technology.

Now the DOD is looking at potential climate mitigation efforts from the adoption of new technologies. AFRL has signed a two-year subcontract to develop a hydrogen fuel cell microgrid (H2MG) that could be replicated by the US Department of Defense. The H2MG project will see gaseous and liquid hydrogen production, storage and utilization technologies integrated into an existing 1.5MW solar microgrid system at the Joint Base Pearl Harbor Hickman (JBPHH) in Hawaii.

That solar microgrid which would support the project has been in operation for eight years at the base.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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